c) [12 marks] An investor can invest in a riskless asset and two portfolios with returns...
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c) [12 marks] An investor can invest in a riskless asset and two portfolios with returns given by: r=α₁+r++ Bi(rm -rf), where i=1, 2, and гM is the return on the market portfolio. The alphas and betas are given by: α1=0.5%, ẞ1=1, a2=-0.5%, ẞ2=1.5. The riskless rate is 2%. The portfolios are well-diversified and, as a result, do not have idiosyncratic risks. Is there an arbitrage opportunity? If so, construct an arbitrage strategy that has a profit of $1. [Hint: find dollar amounts invested in stocks 1, 2, and the riskless asset such that the portfolio has zero value and riskless profit of $1.] c) [12 marks] An investor can invest in a riskless asset and two portfolios with returns given by: r=α₁+r++ Bi(rm -rf), where i=1, 2, and гM is the return on the market portfolio. The alphas and betas are given by: α1=0.5%, ẞ1=1, a2=-0.5%, ẞ2=1.5. The riskless rate is 2%. The portfolios are well-diversified and, as a result, do not have idiosyncratic risks. Is there an arbitrage opportunity? If so, construct an arbitrage strategy that has a profit of $1. [Hint: find dollar amounts invested in stocks 1, 2, and the riskless asset such that the portfolio has zero value and riskless profit of $1.]
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Related Book For
Statistics Data Analysis And Decision Modeling
ISBN: 9780132744287
5th Edition
Authors: James R. Evans
Posted Date:
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