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 8:57 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=6%+1.0f1t+1.0f2t+€A.t
RBt = 8 %+2.0f1t +0.5f2t + E B,t
Rct = 1.9%+f1t
RDt= 3.7%+2.0f2t
The means of both factors are 0. The standard deviation of f1 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%. Are there
any arbitrage opportunities among these assets?
a. There are NO arbitrage opportunities
b. Yes there are arbitrage opportunities
c. Not enough information
d. It depends on whether the risk premium is 1.9 or 3.7
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=6%+1.0f1t+1.0f2t+€A.t
RBt = 8 %+2.0f1t +0.5f2t + E B,t
Rct = 1.9%+f1t
RDt= 3.7%+2.0f2t
The means of both factors are 0. The standard deviation of f1 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%. Are there
any arbitrage opportunities among these assets?
a. There are NO arbitrage opportunities
b. Yes there are arbitrage opportunities
c. Not enough information
d. It depends on whether the risk premium is 1.9 or 3.7