Consider a one factor economy. (1) There are two well-diversified portfolios A and B. Their expected returns are 11% and 9% respectively. Their betas are 1.1 and 0.85, respectively. Both portfolios are fairly priced. Calculate the risk free rate and the expected return of the factor portfolio. (2) There is a third well-diversified portfolio C. Its beta is 1.2. It has a forecasted return of 13%. Is there any arbitrage opportunity? If the answer is yes, how to construct the arbitrage portfolio? (
Consider a one factor economy. (1) There are two well-diversified portfolios A and B. Their expected returns are 11% and 9% respectively. Their betas are 1.1 and 0.85, respectively. Both portfolios are fairly priced. Calculate the risk free rate and the expected return of the factor portfolio. (2) There is a third well-diversified portfolio C. Its beta is 1.2. It has a forecasted return of 13%. Is there any arbitrage opportunity? If the answer is yes, how to construct the arbitrage portfolio? (
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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Transcribed Image Text:Consider
a one factor economy.
(1) There are two well-diversified portfolios A and B. Their expected returns are 11% and 9% respectively. Their betas are 1.1 and 0.85, respectively. Both portfolios are fairly
priced. Calculate the risk free rate and the expected return of the factor portfolio.
(2) There is a third well-diversified portfolio C. Its beta is 1.2. It has a forecasted return of 13%. Is there any arbitrage opportunity? If the answer is yes, how to construct the
arbitrage portfolio? (
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- The risk-free rate and the expected return of the factor portfolio.
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