Suppose you find stock A with positive alpha and stock B with an equal but negative alpha. Which of the following investment strategies takes advantage of an arbitrage opportunity? In other words, which of these strategies makes money for sure, no matter what the market does tomorrow. a)Buy stock A and short stock B. b)Buy stock B and short stock A. C)Buy stock A and stock B so that their alphas offset. d)none of the above

Suppose you find stock A with positive alpha and stock B with an equal but negative alpha. Which of the following investment strategies takes advantage of an arbitrage opportunity? In other words, which of these strategies makes money for sure, no matter what the market does tomorrow. a)Buy stock A and short stock B. b)Buy stock B and short stock A. C)Buy stock A and stock B so that their alphas offset. d)none of the above

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 7MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investor’s optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?
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