An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free assetthat returns 3%. The investor thinks that the returns on these portfolios can be described bya two factormodel, as follows:rA = E(ra) + 1,2 · F 1 + 0,8 · F 2, E(ra) = 14%rB =E(rB) + 1,0 · F 1 + 0,7· F 2, E(rB) = 13%rc = E(rc) + 1,4 · F1 + 0,8 · F 2, E(rc) = 15%Where F, and F2 are factors that affect portfolio returns. Their expected value is zero. Is it possible for thisinvestor to construct an arbitrage portfolio and if so, then how?

Arbitrage opportunity is a concept of buying low asset and selling it high in another market. It…

An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free asset that returns 3%. The investor thinks that the returns on these portfolios can be described by a two factor model, as follows: E(rA) + 1,2 · F1 + 0,8 · F 2, E(ra) = 14% = rB = E(r B) + 1,0 · F1 + 0,7 · F 2, E(rb) = 13% rc = E(rc) + 1,4 · F1 + 0,8 · F 2, E(rc) = 15% %3D Where F, and F2are factors that affect portfolio returns. Their expected value is zero. Is it possible for this investor to construct an arbitrage portfolio and if so, then how?

An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free asset that returns 3%. The investor thinks that the returns on these portfolios can be described by a two factor model, as follows: E(rA) + 1,2 · F1 + 0,8 · F 2, E(ra) = 14% = rB = E(r B) + 1,0 · F1 + 0,7 · F 2, E(rb) = 13% rc = E(rc) + 1,4 · F1 + 0,8 · F 2, E(rc) = 15% %3D Where F, and F2are factors that affect portfolio returns. Their expected value is zero. Is it possible for this investor to construct an arbitrage portfolio and if so, then how?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(Portfolio VaR) Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of $15 million, a 2% chance of a loss of $2 million, and a 93.5% change of a profit of $2 million. The outcomes of these two investments are independent of each other.
b. As an equity portfolio manager, you may use certain risk-adjusted performance measures. Describe and discuss the following measures of performance evaluation! Treynor Index, William Sharpe, Michael Jensen Using the following table evaluate which is better than other using three different measure of performance evaluation. Asset X E(R)% 12 beta Stdv 1.25 16 Y 11 1.0 12 Risk-free 3 0 0 Market index 12 1 12
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Correlation = -1 Stock A B Rate of return Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) Yes No X Answer is not complete. Expected Return 9% 13% % Standard Deviation 45% 55% b. Could the equilibrium rƒ be greater than rate of return?
Parts A-C have already been answered, looking for answer D.
Nikul
You are evaluating various investment opportunities currently available and you have the fol-lowing information about five different well-diversified portfolios of risky assets. Interest raterf = 3% a) Calculate the Sharpe ratio for each portfolio. (b) Explain which of these five portfolios is most likely to be the optimal risky portfolio. (c) Suppose you are willing to invest with an expected return of 6%. What would be theinvestment proportions in the riskless asset and the optimal risky portfolio? What is thestandard deviation of the return for this investment?
Suppose the risk free return is 6%. The beta of a managed portfolio is 1.5, the alpha is 3%, and the average return is 18%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as ___ % ?
Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below. A B C Probabilities return 0.05 0.50% -3.60% 3.60% 0.35 0.60% 2.75% 0.15% 0.45 3.66% 1.45% 0.45% 0.15 -4.80% -0.60% 6.30% Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?
Using the information provided in the pictures: Let’s assume, you want to construct a portfolio of risky and riskfreeassets. You wish to generate a 7% return for your complete portfolio E(rc). Using the Capital AllocationLine (CAL) equation - E(rc) = rf + y(E(Rp) - rf)a. Calculate the portion that you need to invest in risky assets and (b). in risk-free assets.c. Calculate the standard deviation of the portfolio.
This question must be answered using APT i think
Suppose you are given the following inputs for the Fama-Frech-3-Factor model. Required Return for Stock i: bi=0.8, kRF=8%, the market risk premium is 6%, ci=-0.6, the expected value for the size factor is 5%, di=-0.4, and the expected value for the book-to-market factor is 4%. Task: Estimate the required rate of return of this asset using the Capital asset pricing model and compare it with the Fama-French-3-factor model.
2. Assuming the following: Average Return (Risky Portfolio) 3.86% Standard Dev (Risky Portfolio) 10.56% Average Risk Free Rate 2.18% Return on Risk Free Asset Avg 4.15% Using the formula: E(rc)=rf + y* (E(rp) - rf) Solve for: 1. % of Risky Assets (y): 2. % of Risk Free Assets (1-y): Note: You wish to generate a 7% return for your complete portfolio E(rc)

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