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 expected return of 8%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy? (Note: show what the percentage profit from arbitrage will 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 expected return of 8%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy? (Note: show what the percentage profit from arbitrage will be)                         

Expert Answer

1 Rating

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Related Finance Q&A

Find answers to questions asked by student like you

Q: Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a di...

A: Calculate the horizon value and intrinsic value as follows:

Q: ABC is an all-equity firm with an estimated market value of $900,000. The firm sells $325,000 of deb...

A: Equity can be described as the amount raised through selling shares of the company.It is given that,...

Q: Provide an analysis of other common ratios including gross margin, operating margin, current ratio, ...

A: Since, the data is given for one year only so relationship for itself cannot be performed. The provi...

Q: Off-The-Books Investment Firm, LLC, has offered you an investment it says will return to you $20,000...

A: Calculate the annual rate of return as follows:

Q: Evaluating Annie​ Hegg's Proposed Investment in Atilier Industries Bonds     Annie Hegg has been con...

A: Hi, since there are multiple questions posted, we will answer sub parts G and H questions. If you wa...

Q: Assume that your starting salary will be $55,000 per year, and assume that you have no additional in...

A: Gross Annual income = A = $$ 55,000Tax rate, T = 27%Net annual income, B = A x (1 - T) = $ 55,000 x ...

Q: An analyst uses a two-stage variable growth model to estimate the value of Old Maid Company's common...

A: Part A-E:Excel Spreadsheet:

Q: Which of the following events would make it more likely that a company would choose to call its outs...

A: Justification:Callable bond is a type of bond which can be redeemed before its maturity period by th...

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000. Eac...

A: a.The formula to calculate coupon payment received by bondholders is given below:

Q: It is now January 1, 2019, and you are considering the purchase of an outstanding bond that was issu...

A: We will find the Yield to maturity, YTM and yield to call, YTC using the RATE function of excel.

Q: Your two year old has come to you with concerns about her retirement. She has learned of the concept...

A: Calculate the future value as follows:MS-Excel --> Formulas --> Financials --> FV

Q: Gilmore, Inc., had equity of $175,000 at the beginning of the year. At the end of the year, the comp...

A: a) Sustainable growth rate is the rate at which the business would grow. It is calculated by multipl...

Q: NPV and IRR Analysis Cummings Products Company is considering two mutually exclusive investments who...

A: 1.The NPV profiles for Projects A and B are shown below:The correct graph is Graph B.Excel Spreadshe...

Q: Common stock​ value: Constant growth Seagate Technology is a global leader in data storage solutions...

A: D2015 = 1.49; D2019 = 2.51;g = the future constant annual dividend growth rate = the historical annu...

Q: Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520 and interest e...

A: Operating cash flows = NOPAT + Depreciation = EBIT x (1 - Tax rate) + Depreciation = (Sales - Costs ...

Q: If the Rhine Company ignores the possibility that other firms may enter its market, it should set a ...

A: Calculation of present value of earning (PVOE) using excel when the price of product is $10,000:

Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a...

A: Cov (S,B) is calculated as follows:

Q: How can i calculate/solve the following problem? the annual subscription to a health magazine is cur...

A: The present value (PV) of cash inflows is the product of annual cash flows and the PVIFA factor. The...

Q: Use an Excel function to find the expected rate of return based on the following 5 years of historic...

A: Calculate the expected return as follows:

Q: How long would it take an investment to double under each of the following conditions? (a) Interest ...

A: Part (a) If Future Value = FV and present value = PV then,FV = PV x (1 + i)n where i = interest rate...

Q: Evaluating Annie​ Hegg's Proposed Investment in Atilier Industries Bonds     Annie Hegg has been con...

A: Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for yo...

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: The present value (PV) of future cash inflows is calculated by dividing the future cash flows with t...

Q: An organization's primary operations occur in the U.S. and Europe. However, it has relocated its cas...

A: Outsourcing: A business practice under which company hire a third party to complete a specific task ...

Q: I am having some trouble with a similar problem except in this problem you have to determine the dis...

A: The discount rate refers to the interest rate charged on the 200​ day note.

Q: Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your hei...

A: Present Value: The term present value is defined as the current or present day’s value of the amount...

Q: A notoriously haunted house in Tampa has come on the market with a sales price of $150,000. Believin...

A: Financing Amount (PV) = $125,000Interest rate (rate) = 5% per annumTime period (nper) = 15 years Cal...

Q: You have saved $3,000 for a down payment on a new car. The largest monthly payment you can afford is...

A: Computation of the value of car:Hence, the value of car if financed for 48 months is $22,161.14 and ...

Q: You buy a mutual fund for $1,000. It annually distributes $60 for eight years, after which you sell ...

A: Expected rate of return can be described as the total profit or loss on a particular investment over...

Q: How do you calculate present value?

A: Present value:Present value (PV) refers to the current value of future money.

Q: A multinational company that specializes in global finance, trade and risk management has numerous r...

A: In order to reduce cost, the firm should have:Centralized operationsCentralized decision making

Q: Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your hei...

A: Present value of a perpetuity P at an interest rate of r = P / r

Q: I attached an image of things that "could go onto a cash flow statement" would you advise using any ...

A: The building of a factory or purchase of equipment will be counted while calculating capital budgeti...

Q: What is the equivalent present value of the following series of payments: $10,000 the first year, $1...

A: Calculate the equivalent present value as follows:

Q: Choose amounts the 3 listed items that a manufacturer’s inventory may include:  pre-ordered material...

A: A firm's inventory will usually have one or more of the following three types of inventory:1. Raw ma...

Q: Elliott Credit Corp. wants to earn an effective annual return on its consumer loans of 17.1 percent ...

A: Click to see the answer

Q: differecne between 401K and a 401B

A: At the outset, I want to state that there is no relevant comparison between 401(k) and 401(b). A rel...

Q: Rob Thomas Traders opened an account to short-sell 1,000 shares of WeWork at $60. The initial margin...

A: When the money borrowed from the broker for making an investment is made then it is called margin tr...

Q: An investor buys stock for $10,000 and earns dividends of $25” during the course of the year. At the...

A: Calculation of Capital Gains Yield:The capital gains yield is -7%.Excel Spreadsheet:

Q: An Iowa state savings bond can be converted to $100 at maturity 22 years from purchase. If the state...

A: Calculation of bond price:The price at which the state can sell its bond is at $18.39.Excel spread s...

Q: First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City ...

A: Simple interest is the additional amount that the bank pays for depositing a sum in the account. In ...

Q: You were hired as a consultant to XYZ Company, whose target capital structure is  30% debt, 8% prefe...

A: target capital structure:Proportion of debt = Wd = 30%Proportion of preferred capital = Ws = 8% andP...

Q: A pleasant gentleman has advised you via email that you are entitled to a $1 million inheritance. Pu...

A: Inherited amount, PV = $ 1 mn = $ 1,000,000Interest rate = fixed 4% rate, compounded quarterlyhere, ...

Q: the effects of increasing the amount paid upfront when corporations make capital purchases with a fo...

A: Capital expenditure is an expense, that generates profits for a longer period of time which can be m...

Q: marslow hierarchy of need esteem needs

A: Abraham Maslow’s hierarchy of needs can be explained as diagrammed set of human needs and wants that...

Q: Evaluating Annie​ Hegg's Proposed Investment in Atilier Industries Bonds     Annie Hegg has been con...

A: Part d:With increase in inflation rate, the rate will also increase by 1%. The inflation adjusted re...

Q: The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 2.85 percent and ...

A: Calculation of Expected Rate:The expected rate of 10-year Treasury Bond is 7.40%.Excel Spreadsheet:

Q: Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a portion of its planning and financial da...

A: Calculation of initial investment and NPV:Answer:Initial investment is $9,987,714 and NPV is $555,73...

Q: Bob makes his first $1,600 deposit into an IRA earning 7.1% compounded annually on his 24th birthday...

A: Calculation the Future Value of Savings:Initially it is required to calculate the future value of sa...

Q: Problem 2-12 Free Cash Flow (LG2-5) Tater and Pepper Corp. reported free cash flows for 2018 of $48...

A: Calculation of Operating Cash Flow:

Q: Need help with cost savings

A: Computation of operating cash flow:The NPV will be zero when the firm is indifferent among accepting...