• Assume the following single-factor model, where M represents the market factor (well-diversified), ERM is the market risk premium, and E[RP] is the excess return on a well-diversified portfolio:

  ERP=αP+βPERM=0.02+1.8*ERM

  1. Estimate the risk premium on a zero-beta portfolio.
  2. Show how one can use this zero-beta portfolio as an arbitrage opportunity. 
  3. Describe the APT assumptions regarding this arbitrage opportunity. 
  4. If the market has a risk premium of 6%, what is the risk premium on portfolio P, assuming no arbitrage
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Answer rating: 100% (QA)

Answer The risk premium on a zerobeta portfolio is the alpha or intercept of the singlefactor model ... View the full answer