Business, 05.06.2020 18:01 u8p4

Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. 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
B. A;B
C. B;B
D. A; A

The portfolio weight in A is

The portfolio weight in B is

The portfolio weight in risk-free is

Answers: 3

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Answer from: QueenNerdy889

See expl below

Explanation:

For Portfolio A:

Given an expected return rate of 21% and a beta of 1.3.

Risk free rate of return = 8%

Let's use the CAPM equation:

21 = 8 + 1.3X

Let's take X as Risk Premium

$X = \frac{21-8}{1.3} = 10$

For Portfolio B:

Given an expected return rate of 17% and a beta of 0.7

Risk free rate of return = 8%

Let's use the CAPM equation:

17 = 8 + 0.7X

Let's take X as Risk Premium

$X = \frac{17-8}{0.7} = 12.86$

The risk premium of portfolio A is less than the risk premium of portfolio B, we should take a short position in portfolio A and a long position in portfolio B.

Option B is correct.

Let's find the portfolio weight.

Given:

Expected return of portfolio A = 21%

Expected return of portfolio B = 17%

We have a risk free rate of 8%

Let's assume we sell 2 shares of portfolio A and buy 3 shares of portfolio B, i.e

(3 * 17%) - (2 * 21%) = 9%

The 9% is higher than the risk free rate(8%).

Therefore,

Portfolio weight in A = $\frac{2}{2+3} = \frac{2}{5} = 0.40$ = 40% (short)

Portfolio weight in B = $\frac{3}{2+3} = \frac{3}{5} = 0.60$ = 60% (long)

Portfolio weight in risk free = 0

This means in a complete portfolio of 5 shares, if we go 40% of portfolio A short and 60% of portfolio B long, we will have a return rate of 9% which is greater than the risk free rate of 8%

Answer from: Quest

the correct answer would be b, when, queen, calder hall and london.

explanation:

we always capitalize words when a paragraph or sentence is starting, when an important name is used, when a place is being written, or simply when a noun is used, etc. so in this sentence, sentence is starting from 'when', so it will be written in capital letters. secondly, queen is considered to be an important person, so it will also be written in capital letter. next, the name of the town is mentioned, i-e calder hall, which will also be written in capital letters. in the last, city name is being used, 'london', which will also be written in capital letters. so option b is the most appropriate one.

Answer from: Quest

i think the answer would be b hope this

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Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfol...

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