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Capitalise on opportunity

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Reference no: EM133187672

Suppose rf = 7.25% and a well-diversified portfolio P has a beta of 1.5 and an alpha of 1% when regressed against a systematic factor S. Another well diversified portfolio Q has a beta of 1.1 and an alpha of 1.67%.

  1. Using the above information, explain if there is any arbitrage opportunity.
  2. If there is an arbitrage opportunity, what action would you take to capitalise on this opportunity?

Formulae

WP = - βQ / (βP - βQ)

WQ = βP / (βP - βQ)

Reference no: EM133187672

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