Question
Suppose that you identify a group of low-beta stocks that are underpriced with respect to the CAPM. Since you believe that CAPM is the right
Suppose that you identify a group of low-beta stocks that are underpriced with respect to the CAPM. Since you believe that CAPM is the right model for risk, you would like to exploit this anomaly by taking a levered position in these low-beta stocks.
Which of the following statements is correct regarding the situation described above?
A) The levered portfolio will contain a positive amount of Treasury bills.
B) The strategys success crucially hinges on a low enough interest rate for borrowing.
C) If the levered portfolio has a CAPM beta of one, it will have a lower expected return compared to the market portfolio if you can borrow at the riskless rate.
D) The levered portfolio will have a lower return than the unlevered portfolio of low beta stocks.
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