An investor can go either long or short in three well diversified portfolios, A, B and...

 

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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: TA = E(TA) + 1,2 F₁ +0,8 F2, E(A) = 14% E(TB) + 1,0 F1+0,7 F2, E(TB) = 13% rc = E(rc) + 1,4 F₁ +0,8 F2, E(rc) = 15% = . . . Where F, and F₂ are 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: TA = E(TA) + 1,2 F₁ +0,8 F2, E(A) = 14% E(TB) + 1,0 F1+0,7 F2, E(TB) = 13% rc = E(rc) + 1,4 F₁ +0,8 F2, E(rc) = 15% = . . . Where F, and F₂ are 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?

Answer rating: 100% (QA)

To determine if the investor can construct an arbitrage portfolio we need to check for the existence of a portfolio that has a guaranteed positive ret... View the full answer