Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

We believe that the single factor model can predict any individual assets realized rate of return well. Both Portfolio A and Portfolio B are well-diversified:

We believe that the single factor model can predict any individual assets realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + iF + Ei, where E(ei) = 0 and Cov(F, i) = 0

A B
1.2 0.8
E(r) 0.1 0.08

(1) What is the rate of return of the risk-free asset?

(2) What is the expected rate of return of the well-diversified portfolio C with C = 1.6, which also exists in the market?

(3) A fund constructs a well-diversified portfolio D. Studies show that D = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Return Distributions In Finance

Authors: Stephen Satchell, John Knight

1st Edition

0750647515, 978-0750647519

More Books

Students also viewed these Finance questions