You are asked to analyze Portfolio X. You collect the following data: Portfolio X Quality Factor...

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You are asked to analyze Portfolio X. You collect the following data: Portfolio X Quality Factor ETF Expected Return: Expected Volatility: Market Beta: TBD 15% .90 Quality Factor Beta: 1.25 Quality Factor Spread: 1.30% 10.8% 13% .80 1.00 1.30% Market Portfolio 11% 20% 1.00 a. Assuming a risk-free rate of 4%, what is the expected return of Portfolio X according to Arbitrage Pricing Theory (APT) [note: you may assume the only two relevant factors are "Quality" and the market for the purposes of this calculation]? b. Your research department is convinced the actual forward-looking return for Portfolio X is 11%. Using that expectation combined with your answer in part a, construct a profitable arbtrage that combines Portfolio X with (i) the Quality Factor ETF, (ii) the Market Portfolio, and (iii) Treasury Bills. You are asked to analyze Portfolio X. You collect the following data: Portfolio X Quality Factor ETF Expected Return: Expected Volatility: Market Beta: TBD 15% .90 Quality Factor Beta: 1.25 Quality Factor Spread: 1.30% 10.8% 13% .80 1.00 1.30% Market Portfolio 11% 20% 1.00 a. Assuming a risk-free rate of 4%, what is the expected return of Portfolio X according to Arbitrage Pricing Theory (APT) [note: you may assume the only two relevant factors are "Quality" and the market for the purposes of this calculation]? b. Your research department is convinced the actual forward-looking return for Portfolio X is 11%. Using that expectation combined with your answer in part a, construct a profitable arbtrage that combines Portfolio X with (i) the Quality Factor ETF, (ii) the Market Portfolio, and (iii) Treasury Bills.

Answer rating: 100% (QA)

Answer a To calculate the expected return of Portfolio X according to Arbitrage Pricing Theory APT we use the following formula Expected Return RiskFr... View the full answer