Question
80. Mr. X owns a portfolio with the following characteristics (assume that returns are generated by a single-factor model): SECURITY SENSITIVITY PROPORTION EXPECTED RETURN A
80. Mr. X owns a portfolio with the following characteristics (assume that returns are generated by a single-factor model):
| SECURITY | SENSITIVITY | PROPORTION | EXPECTED RETURN |
| A | 2.0 | .20 | 20% |
| B | 3.5 | .40 | 10 |
| C | 0.5 | .40 | 5 |
Mr. X decides to create an arbitrage portfolio with the holdings of security A being .20.
(a) what must be the weights of the other two securities in Mr. Xs arbitrage portfolio?
(b) what is the expected return on the arbitrage portfolio?
(c) If everyone follows Mr. Xs buy and sell decisions, what will be the effects on the prices of the three securities?
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Advanced Bond Portfolio Management
Authors: Frank J. Fabozzi, Lionel Martellini, Philippe Priaulet
1st Edition
0471678902, 9780471678908
