Question
Assume that an asset exists with R 3 = 15% and 3 = 1.2. Further assume the security market line discussed in Problem 1. Design
Assume that an asset exists with R3 = 15% and 3 = 1.2. Further assume the security market line discussed in Problem 1. Design the arbitrage opportunity. The SML from Q1 is E[Ri] = 3 + 6*i. Use the following table to explain the arbitrage opportunity.
Position | Cash Invested | Expected Return | Beta |
Portfolio =? | -$100 (sell $100 of portfolio C short) | -(.11x100) = - $11 | -1.2 |
Portfolio = ?? | +100 (use the $100 from the short sale of C to buy D) | .13 x 100 = $13 | +1.2 |
Arbitrage Portfolio (use this line to verify that you have an arbitrage position) | 0 (zero cost) | +$2 (positive return) | 0 (zero risk) |
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