Assume that the following two index model describes returns bar r i r f b i 1 lambda 1 b i 2 lambda 2 Assume that the following three portfolios are observed (a) According to APT, what is the expected return, factor loading relationship for this market (b) Now consider portfolio $ mathrm D $ with t...

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Assume that the following two-index model describes returns: [bar{r}_{i}=r_{f}+b_{i 1} lambda_{1}+b_{i 2} lambda_{2}] Assume that the following

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Assume that the following two-index model describes returns:

\[\bar{r}_{i}=r_{f}+b_{i 1} \lambda_{1}+b_{i 2} \lambda_{2}\]

Assume that the following three portfolios are observed:

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(a) According to APT, what is the expected return, factor-loading relationship for this market.

(b) Now consider portfolio $\mathrm{D}$ with the following characteristics:

\[r_{D}=15 %, \quad b_{D 1}=2, \quad b_{D 2}=1\]

Is an arbitrage opportunity possible? If yes, then describe the arbitrage opportunity.

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Investment Science

ISBN: 9780199740086

2nd Edition

Authors: David G. Luenberger

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Question Posted: Apr 19, 2024 02:00 AM

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Assume that the following two-index model describes returns: [bar{r}_{i}=r_{f}+b_{i 1} lambda_{1}+b_{i 2} lambda_{2}] Assume that the following

Question:

Portfolio Expected Return (%) bi1 biz A 10 1 0 B 1 0 2 C -2 -1 1

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Investment Science

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