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__.
We should take a long position in the portfolio that is under priced and short position that is over priced. For this we need to calculate the reward-to-risk ratio, which is computed as:
Reward-to-Risk Ratio = (Expected Return - Risk free rate) / Beta
Portfolio A
Reward-to-Risk Ratio = (28% - 5%) / 1.6
Reward-to-Risk Ratio = 14.38%
Portfolio B
Reward-to-Risk Ratio = (21% - 5%) / 0.8
Reward-to-Risk Ratio = 20%
Therefore, Portfolio A is providing lower ratio and is likely to be over priced in the market.
Hence, we should take short position in Portfolio A and long position in Portfolio 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 1.2 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
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
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...
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%....
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.
Consider a one factor economy where the risk free rate is 5%, and portfolios A and B are well diversified portfolios. Portfolio A has a beta of 0.6 and an expected return of 8%, while Portfolio B has a beta of 0.8 and an expected return of 10%. Is there an arbitrage opportunity in this economy? If yes, how could you exploit it?
Consider a 3-factor Arbitrage Pricing Theory (APT) model. Assuming a risk-free rate of 4%, calculate the expected return of this stock. Factor Risk Premium Sensitivity to each factor Change in GDP 5% 1 Change in interest rate 1% 0.5 Inflation ratio 2.5% 0.2 (4 marks) Consider the following portfolio composed of 3 stocks (A, B, C): Stock Quantity Price (£) Beta A 500 1.5 0.8 B 520 1.7 0.97 C 610 1.1 1.04 What is the beta of...
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...
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?
A stock has a beta of 1.6 and an expected return of 16%. A risk-free asset currently earns 5%. If a portfolio of the two assets has a beta (βp) of 0.6, what are the portfolio weights? (wS = 37.5%, wRF = 62.5%) If a portfolio of the two assets has an expected return of 11%, what is its beta? (βp= 0.873)