Homework Help Question & Answers

Please show all equations and work as needed. Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation,...

Please show all equations and work as needed.

Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18%

Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation, would you conclude that there exists an arbitrage opportunity involving the described securities? If your answer is affirmative, show the strategy that you would use to exploit such arbitrage. If your answer is negative, show why that is the case
0 0
Next > < Previous
ReportAnswer #1

According to A:
18%=8%+1*market risk premium
=>market risk premium=10%

So, B's return should be=8%+0.5*10%=13%

But as B's return is 12%, so B is overvalued

Short sell B and buy/long A

Know the answer?
Add Answer of:
Please show all equations and work as needed. Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation,...
Your Answer: Your Name: What's your source?
Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.