MULTIPLE] Consider a single-factor model -conomy. Portfolio M has a beta of 1.0 on the actor and portfolio P has a beta of 0.5 on the actor. The expected returns on portfolios M nd P are 11% and 17%, respectively.

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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[MULTIPLE] Consider a single-factor model
economy. Portfolio M has a beta of 1.0 on the
factor and portfolio P has a beta of 0.5 on the
factor. The expected returns on portfolios M
and P are 11% and 17%, respectively.
Assume that the risk-free rate is 6% and that
arbitrage opportunities exist. Suppose your
form a zero-beta portfolio Z to take the
arbitrage opportunity. Your long and short
position have to be both £100,000. Which of
the following statements are correct?
Your expected profit from taking the
arbitrage opportunity is £4000.
You invest in portfolio P.
You invest at risk-free rate.
You buy the portfolio Z
You invest in portfolio M.
Transcribed Image Text:[MULTIPLE] Consider a single-factor model economy. Portfolio M has a beta of 1.0 on the factor and portfolio P has a beta of 0.5 on the factor. The expected returns on portfolios M and P are 11% and 17%, respectively. Assume that the risk-free rate is 6% and that arbitrage opportunities exist. Suppose your form a zero-beta portfolio Z to take the arbitrage opportunity. Your long and short position have to be both £100,000. Which of the following statements are correct? Your expected profit from taking the arbitrage opportunity is £4000. You invest in portfolio P. You invest at risk-free rate. You buy the portfolio Z You invest in portfolio M.
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