Consider the following data for a one-factor economy. All portfolios are assumed to be...

Question:

Consider the following data for a one-factor economy. All portfolios are assumed to be well-diversified.

Portfolio A F
Expected return 12% 6%
Beta 1.2 0.0

Suppose that another portfolio, portfolio E, is well diversified with a beta of 0.6 and an expected return of 8%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy?

Portfolio Beta:

The beta of a portfolio is a measure of the portfolio's market risk. If we known the market values of assets in the portfolio and the beta of each beta, then the beta of the portfolio is simply the market value weighted average of the asset betas.

Answer and Explanation:

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Consider a portfolio, called it portfolio A, that invests half of the fund in A and half of the fund in F. The beat of portfolio A is:

  • Portfolio A...

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Using the Systematic Risk Principle & Portfolio Beta

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Chapter 12 / Lesson 3
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In this lesson, we'll discuss how investors must understand the systematic risk principle in their portfolio. We'll also explain how investors can measure and define the risk of their portfolios using betas.


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