Portfolio i's return is described by: ri = rf+Bi,m (rm -rf)+Bi,c(rc-rf) +0.5%, where rm is the...
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Portfolio i's return is described by: ri = rf+Bi,m (rm -rf)+Bi,c(rc-rf) +0.5%, where rm is the return on the market index, rc is the return on the commodity index and rf is the risk- free rate. (a). What will be your profit 1 at the end of the period? (c) Now, assume there is no arbitrage in the market (so the alpha of portfolio i should be 0, not 0.5%). What is the expected return on portfolio i if the risk-free rate is 2%, the beta on the market is 1, the risk premium on the market is 5%, the beta on the commodity index is 2, and the risk premium on the commodity index is 3%? (d) Now assume portfolio i has some idiosyncratic risk (e.g., ri = rf +i,m(rm -rf )+i,c(rc -rf)+ 0.5% + i, where i is mean zero and has a variance of .025%). Can we construct a pure arbitrage strategy? Portfolio i's return is described by: ri = rf+Bi,m (rm -rf)+Bi,c(rc-rf) +0.5%, where rm is the return on the market index, rc is the return on the commodity index and rf is the risk- free rate. (a). What will be your profit 1 at the end of the period? (c) Now, assume there is no arbitrage in the market (so the alpha of portfolio i should be 0, not 0.5%). What is the expected return on portfolio i if the risk-free rate is 2%, the beta on the market is 1, the risk premium on the market is 5%, the beta on the commodity index is 2, and the risk premium on the commodity index is 3%? (d) Now assume portfolio i has some idiosyncratic risk (e.g., ri = rf +i,m(rm -rf )+i,c(rc -rf)+ 0.5% + i, where i is mean zero and has a variance of .025%). Can we construct a pure arbitrage strategy?
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Related Book For
Finance for Executives Managing for Value Creation
ISBN: 978-0538751346
4th edition
Authors: Gabriel Hawawini, Claude Viallet
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