Question 6 /10/ a) Company ABX stock has a return of 12%. The portion of the return that is not explained by a two-factor macroeconomic factor model is 5%. Use the data below to calculate company ABX's expected return. (4) Table 1: Macroeconomic Factor Model for ABX Company Stock Variable Actual Value Expected Value Stock's Factor (%) (%) Sensitivity Change in interest 1.0 2.0 1 rate Growth in GDP 4.0 2.0 3.0 b) The table below provides data on four hypothetical portfolios. All investors are assumed to agree upon the expected returns and factor sensitivity of the portfolios. Assume that the following one-factor model describes the expected return for portfolios; E(Rp) = 0.05 +0.05Bp,1 Portfolio Expected Return Factor Sensitivity A 0.0750 0.50 B 0.1500 2.00 C 0.0700 0.40 D 0.0800 0.45 i) Define arbitrage. (1) ii) Assuming the one-factor model is correct and based on the data provided for Portfolios A, B, C and D, determine if an arbitrage opportunity exists. (3) iii) In question (ii) above, if an arbitrage opportunity exists, explain how it may be exploited. (2) Question 6 /10/ a) Company ABX stock has a return of 12%. The portion of the return that is not explained by a two-factor macroeconomic factor model is 5%. Use the data below to calculate company ABX's expected return. (4) Table 1: Macroeconomic Factor Model for ABX Company Stock Variable Actual Value Expected Value Stock's Factor (%) (%) Sensitivity Change in interest 1.0 2.0 1 rate Growth in GDP 4.0 2.0 3.0 b) The table below provides data on four hypothetical portfolios. All investors are assumed to agree upon the expected returns and factor sensitivity of the portfolios. Assume that the following one-factor model describes the expected return for portfolios; E(Rp) = 0.05 +0.05Bp,1 Portfolio Expected Return Factor Sensitivity A 0.0750 0.50 B 0.1500 2.00 C 0.0700 0.40 D 0.0800 0.45 i) Define arbitrage. (1) ii) Assuming the one-factor model is correct and based on the data provided for Portfolios A, B, C and D, determine if an arbitrage opportunity exists. (3) iii) In question (ii) above, if an arbitrage opportunity exists, explain how it may be exploited. (2)