Suppose I have the choice of two assets and that the CAPM holds. Suppose I wish...

 

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Suppose I have the choice of two assets and that the CAPM holds. Suppose I wish to limit my exposure to market risk somewhat by combining these two assets into a portfolio. Suppose one asset, Asset A, has a market beta equal to m,A = 1.8. The other asset, Asset B has a market beta equal to Bm,B=0.64. What weights will I have to have on the two assets so that the beta of my portfolio is equal to 0.75. (Recall weights must sum to 1!) (b) Suppose I have the same two assets as part (a). Additionally, suppose I wish to actually in- crease my exposure to market risk but cannot borrow at the risk free rate. What weights will I have to have on the two assets so that the beta of my portfolio is equal to 2.5? (Recall weights must sum to 1!) (c) Suppose I have a market with one risk factors. There is a well diversified portfolio B that has the following BB = 1 and it has an expected return of 5 percent. The risk free rate is 2 percent. Suppose a well diversified portfolio A has the following beta BA = 1.5 and has an expected return of 8 percent. Does an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage for a trade of 1000 dollars? Suppose we have a market comprised of one risk factor. The expected excess return on a well diversified portfolio A is 12.5 percent and it has a a factor BA = 1.2. The expected excess return on a well diversified portfolio B is 3.2 percent and it has a factor BB = 0.3. Does an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage for a trade of 1000 dollars? Suppose I have the choice of two assets and that the CAPM holds. Suppose I wish to limit my exposure to market risk somewhat by combining these two assets into a portfolio. Suppose one asset, Asset A, has a market beta equal to m,A = 1.8. The other asset, Asset B has a market beta equal to Bm,B=0.64. What weights will I have to have on the two assets so that the beta of my portfolio is equal to 0.75. (Recall weights must sum to 1!) (b) Suppose I have the same two assets as part (a). Additionally, suppose I wish to actually in- crease my exposure to market risk but cannot borrow at the risk free rate. What weights will I have to have on the two assets so that the beta of my portfolio is equal to 2.5? (Recall weights must sum to 1!) (c) Suppose I have a market with one risk factors. There is a well diversified portfolio B that has the following BB = 1 and it has an expected return of 5 percent. The risk free rate is 2 percent. Suppose a well diversified portfolio A has the following beta BA = 1.5 and has an expected return of 8 percent. Does an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage for a trade of 1000 dollars? Suppose we have a market comprised of one risk factor. The expected excess return on a well diversified portfolio A is 12.5 percent and it has a a factor BA = 1.2. The expected excess return on a well diversified portfolio B is 3.2 percent and it has a factor BB = 0.3. Does an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage for a trade of 1000 dollars?

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a To determine the weights of the two assets in a portfolio with a target beta of 075 we can use the formula p wA A wB B where p is the beta of the portfolio wA and wB are the weights of assets A and ... View the full answer