Question
5. Suppose that asset returns satisfy the single factor model: ri = E(ri ) + iF + ei , and let P and Q represent
5. Suppose that asset returns satisfy the single factor model: ri = E(ri ) + iF + ei , and let P and Q represent two well diversified portfolios. Suppose that p < q and E(rp) > E(rq).
a. Show there exists an arbitrage opportunity provided that investors can borrow at a rate of interest that is below E(rq)
b. Does there exist an arbitrage opportunity if the borrowing rate is greater than E(rq )?
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Economics
Authors: Campbell McConnell, Stanley Brue, Sean Flynn
21st Edition
1259723224, 9781259723223
