Q) P_A/B is assumed to be constant in the example. How would relaxation of this assumption affect the way you want to conduct the stub trading strategy and the profitability from such strategy? Please discuss. No calculation is needed.

A HF has a capital of $10 million but need to retain cash of $1 million for unforeseen situations. Shares can be borrowed from the prime broker at an margin ratio of 18%. The HF has identified a list of underpriced shares A and a list of overpriced shares B, B BB 1.5 E(RB) 22% ERA 30% Assume CAPM: R 5%, E(RM) 20% ECR) under CAPM 5 1.5 (20 5) J 27.5% A's ex-ante alpha 2,5% B's ex-ante alpha 5.5%