Assume that there are two factors that price assets. Interest rate rf = 4%. You have the following information about two well-diversified arbitrage-free risky portfolios. (a) Calculate the risk premium of the two risk factors. (b) There is a third well-diversified portfolio with β1 = 1.1 and β2 = 0.9. What is this portfolio’s arbitrage free expected return? (c) Suppose the forecasted return of the portfolio in the question (b) is 13.5%. Show how you could construct an arbitrage portfolio.
Assume that there are two factors that price assets. Interest rate rf = 4%. You have the following information about two well-diversified arbitrage-free risky portfolios. (a) Calculate the risk premium of the two risk factors. (b) There is a third well-diversified portfolio with β1 = 1.1 and β2 = 0.9. What is this portfolio’s arbitrage free expected return? (c) Suppose the forecasted return of the portfolio in the question (b) is 13.5%. Show how you could construct an arbitrage portfolio.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Assume that there are two factors that price assets. Interest rate rf = 4%. You have the
following information about two well-diversified arbitrage-free risky portfolios.
(a) Calculate the risk premium of the two risk factors.
(b) There is a third well-diversified portfolio with β1 = 1.1 and β2 = 0.9. What is this
portfolio’s arbitrage free expected return?
(c) Suppose the
could construct an arbitrage portfolio.
Transcribed Image Text:Asset E(r)
1
15%
2
12%
B₁ B₂
1.5
1
1
0.8
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