ZuoTi.Pro
Question

Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return...

Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 19%. Portfolio B has a beta of 1.3 and an expected return of 8%. The risk-free rate of return is 3%. You can create a portfolio D which invests ____% in portfolio A and the rest in the risk-free asset so that it has the same beta as portfolio B, and compare the returns to portfolio D and portfolio B to decide the direction of arbitrage trading.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Portfolio A beta = 2.0

Portfolio B beta = 1.3

Risk Free asset beta = 0

Let w be weight in Portfolio A,

1.3 = w(2) + (1 - w)0

w = 65%

Expected Return of Portfolio D = 0.65(0.19) + 0.35(0.03) = 13.40%

Expected Return of Portfolio B = 8%

0 0
Add a comment
Know the answer?
Add Answer to:
Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Consider the single factor APT. Portfolio A has a beta of 1.2 and an expected return...

    Consider the single factor APT. Portfolio A has a beta of 1.2 and an expected return of 24%. Portfolio B has a beta of .8 and an expected return of 20%. The risk-free rate of return is 7%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A;B A;A B;A B;B

  • Consider the single factor APT. Portfolio A has a beta of 1.6 and an expected return...

    Consider the single factor APT. Portfolio A has a beta of 1.6 and an expected return of 28%. Portfolio B has a beta of 0.8 and an expected return of 21%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio__ and a long position in portfolio__.

  • 11. Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected...

    11. Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio and a long position in portfolio A. A: A B.A; B C. B; A D. B; B

  • Assuming the single-factor APT model applies, the factor beta for the market portfolio is: zero. one....

    Assuming the single-factor APT model applies, the factor beta for the market portfolio is: zero. one. the average of the risk-free beta and the beta for the highest risk security in the portfolio. impossible to calculate without collecting sample data. irrelevant to the model.

  • 2. Suppose there are two independent risk factors governing securities returns according to the two factor...

    2. Suppose there are two independent risk factors governing securities returns according to the two factor APT. The risk-free rate is 10%. The following well-diversified portfolios exist: beta with respect beta with respect Expected Return to factor 1 to factor 2 Portfolio #1 25% Portfolio #2 25% (a) What are the expected returns on each of the two risk factors in this economy? (b) Suppose another portfolio has a beta with respect to the first factor of 1, a beta...

  • Assume that you are using a two-factor APT model, with factors A and B, to find...

    Assume that you are using a two-factor APT model, with factors A and B, to find the fair expected return on a well-diversified portfolio Q that has an actual expected return of 18%. Portfolio Q's factor loadings (i.e., Q's betas on each of the two factors) and the factors' risk premiums are shown in the table below. Portfolios for factors A and B are tradable (i.e., you can take long or short positions in them). The risk-free rate is 3.5%....

  • 13. Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free...

    13. Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: Portfolio ββ on F1 ββ on F2 Expected Return A 1.0 2.0 19 % B 2.0 0.0 12 % Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should be?Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio should be?

  • 9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT)...

    9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply. The APT is more restrictive than the Capital Asset Pricing Model (CAPM). The APT assumes that all investors hold the market portfolio The APT does not identify the relevant factors. The APT does not restrict the number or nature of the factors relevant to the determination of a stock's return. Karine, an analyst at Graffiti Aviation (GA), models...

  • 9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT)...

    9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply. The APT does not restrict the number or nature of the factors relevant to the determination of a stock's return. The APT assumes that all investors hold the market portfolio. The APT is more restrictive than the Capital Asset Pricing Model (CAPM). The APT does not identify the relevant factors. Emily, an analyst at PietreDure Prestige (PDP), models...

  • Please answer Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check...

    Please answer Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply The APT is more general than the Capital Asset Pricing Model (CAPM) The APT maintains that the realized return on any stock depends on changes unique to the firm. The APT model maintains that the realized returns on stocks depend on unexpected changes in fundamental economic factors The APT identifies all relevant factors that affect the realized returns on stocks Imani,...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT