Question
There are two systematic factors in a hypothetical economy. The GDP factor is denoted by f1 and the Interest Rate factor is denoted by f2.
There are two systematic factors in a hypothetical economy. The GDP factor is denoted by f1 and the Interest Rate factor is denoted by f2. A, B, C, and D are four portfolios in this economy. They have the following structure of returns:
RAt = 7%+1.0f1t+1.0f2t
RBt= 8%+2.0f1t +0.5f2t
RCt = 1.5%+f1t
RDt = 8%+2.0f2t
The means of both factors are 0. The standard deviation of fi is 30% and the standard deviation of f2 is 10%. The two factors are not correlated with each other. The risk free rate is 0%.
What is the maximum amount of money you can make, without any personal investment, and without any risk, using these assets?
a. $1.5 by investing $100 in asset C and borrowing from the riskless rate
b. None of these options are correct
c. $0, as there are no arbitrage opportunities
d. Not enough information
e. Infinity (if infinite borrowing is allowed) as there are arbitrage opportunities
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