Question
Assume both X and Y are well-diversified portfolios and the risk-free rate is 8%. The expected returns and factor betas (one factor) are: Portfolio Expected
Assume both X and Y are well-diversified portfolios and the risk-free rate is 8%. The expected returns and factor betas (one factor) are:
Portfolio Expected Return Beta
X 16% 1.0
Y 12% 0.25
a. Is there an arbitrage opportunity? If so, what is the trade and the payoff?
b. Suppose short selling were prohibited. Would there still be an arbitrage?
Please show work and explanations.
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Fundamentals Of Financial Management
Authors: Richard Bulliet, Eugene F Brigham, Brigham/ Houston
11th Edition
1111795207, 9781111795207
