Question: The S&P500 expected return is 20%, and 3 Month T-bill rate is 2% . IBM has an expected return of 19% and a systematic risk

The S&P500 expected return is 20%, and 3 Month T-bill rate is 2%.

IBM has an expected return of 19% and a systematic risk of beta =0.4

SQ has an expected return of 31% and a systematic risk of beta=1.6

1. What are alphas for each stock?

2. Based on alphas, we should buy(IBM/SQ) _____________ and short sell(IBM/SQ) __________________.

3. What are the reward-to-beta ratios for each stock?

4. Based on the ratios, we should buy(IBM/SQ) ______________ and short sell(IBM/SQ) _______________.

5. Build an arbitrage portfolio by: (answer the weight for each asset)

The portfolio's arbitrage return would be ____________.

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