There are two systematic factors in a hypothetical economy. The GDP factor is denoted by f1 and the Interest Rate factor
Posted: Mon May 02, 2022 8:50 am
There are two systematic factors in a hypothetical economy. The
GDP factor is denoted by f1 and the Interest Rate factor is denoted
by f2. A, B, C, and D are four portfolios in this economy. They
have the following structure of returns:
RAt = 7%+1.0f1t+1.0f2t
RBt= 8%+2.0f1t +0.5f2t
RCt = 1.5%+f1t
RDt = 8%+2.0f2t
The means of both factors are 0. The standard deviation of fi is
30% and the standard deviation of f2 is 10%. The two factors are
not correlated with each other. The risk free rate is 0%.
What is the maximum amount of money you can make, without any
personal investment, and without any risk, using these assets?
a. $1.5 by investing $100 in asset C and borrowing from the
riskless rate
b. None of these options are correct
c. $0, as there are no arbitrage opportunities
d. Not enough information
e. Infinity (if infinite borrowing is allowed) as there are
arbitrage opportunities
GDP factor is denoted by f1 and the Interest Rate factor is denoted
by f2. A, B, C, and D are four portfolios in this economy. They
have the following structure of returns:
RAt = 7%+1.0f1t+1.0f2t
RBt= 8%+2.0f1t +0.5f2t
RCt = 1.5%+f1t
RDt = 8%+2.0f2t
The means of both factors are 0. The standard deviation of fi is
30% and the standard deviation of f2 is 10%. The two factors are
not correlated with each other. The risk free rate is 0%.
What is the maximum amount of money you can make, without any
personal investment, and without any risk, using these assets?
a. $1.5 by investing $100 in asset C and borrowing from the
riskless rate
b. None of these options are correct
c. $0, as there are no arbitrage opportunities
d. Not enough information
e. Infinity (if infinite borrowing is allowed) as there are
arbitrage opportunities