Calculate the expected abnormal return

Reference no: EM132066057

Question: The large number of securities in each of the ten portfolios convinces you that they are well-diversified collections of assets. Thus, you intend to put together risk-free investment strategies by constructing zero-beta portfolios based on CAPM. Suppose that the risk-free rate is 1% and average return on S&P500 is 7%. Portfolio X features ßX = 1.7 and an expected return of 10.8% annually. What is its expected abnormal return (aX) given a single-index model? What are the necessary weights of investment in portfolio X and the market index portfolio (denote by wX and wM, respectively) to construct a zero-beta portfolio for X? Calculate the expected abnormal return of the zero-beta portfolio, aZ. Clearly explain the appropriate trading strategy given the magnitude and sign of aZ.

Reference no: EM132066057

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