Reference no: EM13839051
Question 2: Arbitrage
Having shown your skills in the quantitative research department, your boss wants youto continue your work on stock analysis. One of the tasks the research department isinvolved in is active portfolio management, i.e., identifying mispricings and takingpositions based on these mispricings. Your boss has presented you with the followingportfolios that can be invested in:
- Portfolio A has an expected return of 15% p.a. and a market beta of 1.6
- Portfolio B has an expected return of 9% p.a. and a market beta of 0.6
a) The risk-free rate is 3%. Could you tell your boss whether any arbitrageopportunities are available? What is the arbitrage profit in percentage?
b) If you know that short-selling requires a margin deposit of 40% of the value shorted and you have $3 million to invest in the arbitrage, how much money can you make on the arbitrage?
c) After a careful analysis, you realize that the strategy above relies on the CAPM being the correct asset pricing model. However, you realize that there may bea more appropriate 2-factor model that besides market risk also considersinterest rate risk. You have found that the market risk premium is 10% and theinterest rate risk premium is 5%. Portfolio A has a beta of 1.6 on the market riskpremium and, in addition, a beta of -1.0 on the interest rate risk premium.Portfolio B has a beta of 0.7 on the market risk premium and, in addition, a betaof -0.2 on the interest rate risk premium.
With this new 2-factor asset pricing model do you still find that there is an arbitrage opportunity? What does your new conclusion tell you about thearbitrage opportunity identified before?
|
Define aviation-related aspects of the cuban missile crisis
: If ordered to do so, their aviation assets and nuclear weapons could have changed the world beyond recognition, if not have destroyed it entirely. Write about the aviation-related aspects of the Cuban Missile Crisis and its successful resolution.
|
|
Cold chiller corporation (ccc) has annual sales
: Cold Chiller Corporation (CCC) has annual sales of $10 million, cost of goods sold of 60 percent, average age of inventory of 80 days, average collection period of 35 days, average payment period of 30 days, and purchases that are 60 percent of cost ..
|
|
List the usability heuristic items that you would consider
: List the usability heuristic items that you would consider to be essential for this user evaluation; Briefly describe why you have chosen each item and what you expect it to show you.
|
|
Which do you prefer if interest rate is four percent
: You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer?
|
|
The quantitative research department
: Having shown your skills in the quantitative research department, your boss wants youto continue your work on stock analysis. One of the tasks the research department isinvolved in is active portfolio management, i.e., identifying mispricings and tak..
|
|
Required return on green equity
: What is the required return on Green's equity after the restructuring? Required Return?
|
|
What communication strategies are associated with leadership
: What communication strategies are associated with effective leadership. What are some barriers to effective communication that a leader should overcome
|
|
Which visions of art education do you think are best
: Eisner's reading on "Visions and Versions of Art Education" introduces you to a variety of contemporary curricular approaches in art education. Which visions and versions of art education do you think are best? Why
|
|
Valediction: forbidding mourning
: Read Donne's "A Valediction: Forbidding Mourning." Use the annotated version to assist your understanding of the poem. To get started: Choose a topic and a comparison. What will your topic be and to what can it be compared? Remember to choose a compa..
|