Consider the following information on the estimated factor loadings for a two-factor APT model for three well-diversified portfolios. Beta1 Beta2 E(r) Port A 1.5 .3 .15 Port B .75 .65 .15 Port C 0 1.0 .21 The risk-free rate is 1% per annum. Beta1 is the factor loading on Factor 1 and Beta2 is the factor loading for factor 2; E(r) denotes the expected return. Assume there are no transactions costs and that you can short the portfolios and borrow and lend at the risk-free rate (you can obviously go long in the portfolios too). This question has you determine whether or not there exists an arbitrage opportunity with these three portfolios? A. If you just consider portfolios B and C, what are the first-factor and the second-factor risk premia that are consistent with the expected returns on B and C. B.Is there is an arbitrage opportunity? If yes, describe one way in which you could exploit it; be precise about what you would buy and sell and in what proportions (or dollar amounts).
Consider the following information on the estimated factor loadings for a two-factor APT model for three well-diversified portfolios.
Beta1 Beta2 E(r)
Port A 1.5 .3 .15
Port B .75 .65 .15
Port C 0 1.0 .21
The risk-free rate is 1% per annum. Beta1 is the factor loading on Factor 1 and Beta2 is the factor loading for factor 2; E(r) denotes the expected return.
Assume there are no transactions costs and that you can short the portfolios and borrow and lend at the risk-free rate (you can obviously go long in the portfolios too).
This question has you determine whether or not there exists an arbitrage opportunity with these three portfolios?
A. If you just consider portfolios B and C, what are the first-factor and the second-factor risk premia that are consistent with the expected returns on B and C.
B.Is there is an arbitrage opportunity? If yes, describe one way in which you could exploit it; be precise about what you would buy and sell and in what proportions (or dollar amounts).
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