Assume that the following portfolios A and B are well diversi\ufb01ed, with E[ra] = 9% and E[rb] = 11%.<\/p>\n
In a one factor economy with \u03b2a = 0.8 and \u03b2b = 1.2 and a risk-free rate of 8%:<\/p>\n
(a) establish an arbitrage. Especially, derive the exact holdings in A, B, and the risk free rate of a<\/p>\n
new portfolio (called X) so that X is an arbitrage opportunity.<\/p>\n
(b) Explain why X (from part i) of this question) is an arbitrage opportunity.<\/p>\n
(c) Now assume that B is the market portfolio and A is a single stock (IBM). Draw the SML. Argue<\/p>\n
why (or why not) you can still construct an arbitrage opportunity using A, B, and the risk-free<\/p>\n
rate. Can you think of a di\ufb00erent theory that might provide investment advice in this situation?<\/p>\n","protected":false},"excerpt":{"rendered":"
Assume that the following portfolios A and B are well diversi\ufb01ed, with E[ra] = 9% and E[rb] = 11%. In a one factor economy with \u03b2a = 0.8 and \u03b2b = 1.2 and a risk-free rate of 8%: (a) establish Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-174379","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/174379","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=174379"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/174379\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=174379"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=174379"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=174379"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}