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Recall that the definition of arbitrage required the satisfaction of three conditions: one about weights, one about risk and one about returns. Consider the following
Recall that the definition of arbitrage required the satisfaction of three conditions: one about weights, one about risk and one about returns. Consider the following scenario in a one-factor APT:
E[r] | B1 | |
Asset X | 3.8% | 0.9 |
Asset Y | 3.5% | 2.1 |
Asset Z | 13.9% | 3.3 |
What is the expected return of an arbitrage portfolio composed of all three assets, X, Y and Z? Weights will be between +1 and -1.
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