Consider a single factor APT. Portfolio A has a beta of 1.5 and an expected return...
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Consider a single factor APT. Portfolio A has a beta of 1.5 and an expected return of 11%. Portfolio B has a beta of 0.5 and an expected return of 5%. a. (10 points) Would an arbitrage opportunity exist if the risk-free rate of return is 4%? If so, what would the arbitrage strategy be (i.e., how would you construct the arbitrage portfolio with Portfolio A, Portfolio B and T- bills)? b. (15 points) In equilibrium, what must be the expected return on a portfolio with a beta of 1.2 in this economy? Consider a single factor APT. Portfolio A has a beta of 1.5 and an expected return of 11%. Portfolio B has a beta of 0.5 and an expected return of 5%. a. (10 points) Would an arbitrage opportunity exist if the risk-free rate of return is 4%? If so, what would the arbitrage strategy be (i.e., how would you construct the arbitrage portfolio with Portfolio A, Portfolio B and T- bills)? b. (15 points) In equilibrium, what must be the expected return on a portfolio with a beta of 1.2 in this economy?
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