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QUESTION 22 There is a single MARKET risk factor in the economy. In the table below, all portfolios are well-diversified and the risk-free rate is
QUESTION 22
- There is a single MARKET risk factor in the economy. In the table below, all portfolios are well-diversified and the risk-free rate is 4%. If you were to form an arbitrage strategy, you would:
Portfolio E(R) Market BETA ABC 11% 1.2 XYZ 11.5% 1.5 Market 9% 1 a Buy ABC, short sell Market portfolio, borrow risk free rate
b Buy ABC, short sell Market portfolio, buy risk free rate
c Short sell XYZ, buy Market portfolio, borrow risk free rate
d Short sell XYZ, buy Market portfolio, buy risk free rate
e None of the above
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