Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. consider the following risky portfolios (a, b, m)

Consider the following risky portfolios (A, B, M) and the riskless asset F: Expect rate...

80.2K

Verified Solution

Question

Finance

Consider the following risky portfolios (A, B, M) and the riskless asset F: Expect rate of return Beta relative to M Standard deviation of the regression (on M) residuals A 21% 1.6 20% B 15% 1.2 20% M 10% 1 0 F 4% 0 0 1. What are the alphas of portfolios A and B? 2. Create an arbitrage portfolio from the above assets with the weight WA = 1, and WB to be determined. What are WM and WF? 3. Write algebraic expressions for the expected arbitrage profit and the standard deviation, assuming the correlation between the residuals is -0.2. 4. The best choice for WB is the one that maximizes the ratio of expected profit to standard deviation of the profit. Write the algebraic expression for this ratio and find the optimal WB. You can do it using calculus or by plotting the ratio for various WB and selecting the optimum visually. 5. For your choice of WB, what is the expected profit if the notional investment in A is $1 million? 6. Assuming a normal distribution, what is the chance that the arbitrage strategy will end-up in a loss?

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

1. A 25 kg box is lifted upward at a constant rate of 2 m/s....

Physics
Q

An equiconvex lens of refractive index 3 2 and of radius of curvature 16 cm...

Physics
Q

Suppose a large gumball machine has 25% pink gumballs. Imagine taking a simple random sample...

Basic Math
Q

Natural draft cooling tower are shaped like hyperbola for more efficient cooling of power plants...

Calculus
Q

cide whether the following equation is true or false sin e cos 0 tan 0...

Calculus
Q

Find the following integral Note that you can check your answer by differentiatio S 6e4...

Calculus
Q

20,00024(1-.056)(1-.12)/.12

Accounting
Q

Lopez Company is considering replacing one of its old manufacturing machines. The old machine has...

Accounting
Q

Cost Behavior Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled...

Accounting
Q

1. Suppose you are a fund manager, and you have to assets A and B...

Finance
Q

Check Suppose you are attempting to value a 1-year expiration option on a stock with...

Finance
Q

A decide to obtain $1 million additional equity financing to expand its business from a...

Finance