Q3 An investor can go either long or short in three well diversified portfolios, A, B...

 

Transcribed Image Text:

Q3 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, where F, and F₂ are factors with expected value equal to zero, that affect portfolio returns according to the following table, showing expected excess rate of return and ß with respect to each factor. B с Risk free Exp.return 14% 13% 15% 3% Beta-1 1,2 1 1,4 0 Beta-2 0,8 0,7 0,8 0 Is it possible for this investor to construct an arbitrage portfolio and if so, then how? Q3 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, where F, and F₂ are factors with expected value equal to zero, that affect portfolio returns according to the following table, showing expected excess rate of return and ß with respect to each factor. B с Risk free Exp.return 14% 13% 15% 3% Beta-1 1,2 1 1,4 0 Beta-2 0,8 0,7 0,8 0 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