Question
Answered step-by-stepAsked by DrMantisMaster525 on coursehero.com
a. Assuming a risk-free rate of 4%, what is the expected return of...
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4. You are asked to analyze Portfolio X. You collect the following data:
Portfolio X
Quality Factor ETF
Market Portfolio
Expected Return:
TBD
10.8%
11%
Expected Volatility:
15%
13%
20%
Market Beta:
.90
.80
1.00
Quality Factor Beta:
1.25
1.00
Quality Factor Spread:
1.30%
1.30%
a. Assuming a risk-free rate of 4%, what is the expected return of Portfolio X
according to Arbitrage Pricing Theory (APT) [note: you may assume the
only two relevant factors are "Quality" and the market for the purposes of
this calculation]?
b. Your research department is convinced the actual forward-looking return for
Portfolio X is 11%. Using that expectation combined with your answer in
part a, construct a profitable arbtrage that combines Portfolio X with (i) the
Quality Factor ETF, (ii) the Market Portfolio, and (iii) Treasury Bills.arbitrage
Answer & Explanation
Solved by verified expertAnswered by EarlRam3327 on coursehero.com
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