Reference no: EM133070742

For the next three questions, consider a market neutral hedge funds invested in the "Betting Against Beta" strategy. The strategy involves going long low beta stocks and short high beta stocks due to a view that investors have excess demand for high beta assets due to leverage constraints. In this particular strategy, the following assets can be traded

Asset class	Expected annual return	Market β
Risk free	2%	0
Portfolio of low β stocks	6%	0.5
Market portfolio	7%	1.0
Portfolio of high β stocks	8%	1.5

 Let w_rf, w_low, w_market, and w_high denote the portfolio weights of the investment in each of the asset classes such that w_rf+w_low+w_market+w_high=1. According to its investment mandate, hedge fund AAA should target a gross leverage of 2. Which portfolio will this hedge fund hold?

a.  w_rf=-1, w_low=1.5, w_market=0, w_high=-0.5

b. w_rf=-1, w_low=3, w_market=0, w_high=-1

c. w_rf=0, w_low=1.5, w_market=0, w_high=-0.5

d. w_rf=1, w_low=1, w_market=0, w_high=-1

f. w_rf=0, w_low=1, w_market=1, w_high=-1

g. w_rf=-1, w_low=-1, w_market=0, w_high=3