Question: There is ONE risk factor, the interest rate risk factor. Investors can borrow at the risk-free rate. Portfolio (A) is well diversified with the following

There is ONE risk factor, the interest rate risk factor. Investors can borrow at the risk-free rate. Portfolio (A) is well diversified with the following risk-return profile.

	Beta	Risk Premium
Portfolio (A)	0.8	5%
Interest Rate Risk Factor	1	6%
Risk Free rate = 4%

For a portfolio that earns a positive risk-free profit, a trader would:

a) Buy Portfolio (A) and short sell Interest rate risk factor, borrow at risk-free rate

b) Buy Portfolio (A) and short sell Interest rate risk factor

c) Short sell Portfolio (A), buy interest rate risk factor, borrow at risk-free rate

d) Buy Portfolio (A), buy interest rate risk factor, borrow at risk-free rate

Please explain. Thank you!

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

1-1 Explain the components that make up the definition of consumer behavior.

Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at the risk-free rate rf of 3%. Portfolio (A) is well-diversified with the risk-return profile below. If an...

3. Calculating interest rates The real risk-free rate (r') is 2.8% and is expected to remain constant. ination is expected to be 6% per year for each of the next three years and 5% thereafter. The...

Questions were written in the word file named questions, and the question related powerpoint slides were named as slides. Thanks in advance. 1) The common stock of Marielle Machinery will generate...

I attached a sample questions that you had your site but no answers. I wanted to check my work with the answers. Do you have the answers to these questions. I see some for some other finance exams...

Check Attached file and solve these questions about Finance. Introduction to Finance 1. Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of 18...

1. (It) points) Which of the following information would provide evidence against the semi-strong form of the eicient market hypothesis {assuming that each of the statements themselves is true)?...

1. If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the: A. project's IRR equals 10%. B. project's rate of return is greater than 10%. C. net...

6.1) The risk measure used in the market model is: The standard deviation in the return of the security; The alpha coefficient (a i) of the title; Non-systematic risk la Valeur to Risque; none of...

Question 1 (25 marks) AMCOR Limited has a corporate bond outstanding with a 7% coupon, semi-annual interest, 15 years to maturity and a face value of $1,000. Similar bonds currently yield 13%. By...

d) Gas mixture containing H;S and air from a petroleum distillation column, has its concentration of H;S reduced from 4.0 mol % to 0.1 mol % by scrubbing with a triethanolamine-water solvent in a...

The reaction SO2CI2(g) SO2(g) + CI2(g) is first order in SO2Cl2.Using the following kinetic data, determine the magnitude and units of the first-order rate constant: Time (s) Pressure SO2CI2 (atm)...

Celia is the CEO of a midsize corporation. At the start of an Important business meeting, she presents her staff with a convoluted and risky sales plan she has devised. When she then perfunctorily...

9. (15 points) A company is considering a new project that requires an investment of \$5 million. The project is expected to generate cash flows of $2 million in year 1,$3 million in year 2, and $4...

Brett Geiger of the human resources department has received complaints from several managers during the past few months about employees surfing the Internet, answering personal e-mail, shopping...

Explain why the following paragraph would be ineffective in closing a persuasive request message. Rewrite the paragraph to be more effective. (Objective 4) If you are willing to participate in the...

What are the purposes of collection messages? (Objective 5)