Suppose that you have access to two funds.Fund 1 has a ČAPM beta of 0.4, Fund 2 has aCAPM beta of 1.9. Fund 1 has an averagereturn of 8.5% and Fund 2 has an averagereturn of 10.5%. The riskless rate is 5% and themarket risk premium is 7%. You would like toconstruct a Betting-against-Beta (BaB)strategy by levering up Fund 1 and deleveringFund 2 so that both have a beta of 1.75.Assume that you can borrow and lend at theriskless rate.What is the expected return on the zero-coststrategy long in levered Fund 1 and short indelevered Fund 2?A.8.00%B.4.39%C.2.93%D.10.25%

Solution- If we levered fund 1 by borrowing then Let borrowing weight is (-) X therefore weight of…

Answered: Suppose that you have access to two…

Suppose that you have access to two funds. Fund 1 has a ČAPM beta of 0.4, Fund 2 has a CAPM beta of 1.9. Fund 1 has an average roturn of 8 50/ and Eund 2 b as an -y

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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Question

Suppose that you have access to two funds.
Fund 1 has a ČAPM beta of 0.4, Fund 2 has a
CAPM beta of 1.9. Fund 1 has an average
return of 8.5% and Fund 2 has an average
return of 10.5%. The riskless rate is 5% and the
market risk premium is 7%. You would like to
construct a Betting-against-Beta (BaB)
strategy by levering up Fund 1 and delevering
Fund 2 so that both have a beta of 1.75.
Assume that you can borrow and lend at the
riskless rate.
What is the expected return on the zero-cost
strategy long in levered Fund 1 and short in
delevered Fund 2?
A.8.00%
B.4.39%
C.2.93%
D.10.25%

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