INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 10, Problem 3CP
Summary Introduction
To select: Condition of positive alpha value in zero investment portfolios.
Introduction : The value of alpha is a difference of expected return to the actual return of the portfolio. The return nature is abnormal given by the equilibrium pricing model like
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What is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of return.c. Negative rate of return.d. Risk-free rate of return.
Suppose the solid line represents the capital market line that results from a CAPM equilibrium and the dotted curves represent indifference curves for a given individual. Which of the following is correct if point M corresponds to the market portfolio?
Group of answer choices
The individual optimally holds only the market portfolio, M.
The individual optimally holds portfolio B which can be partially characterized by a long position in the riskless asset.
The individual optimally holds portfolio B which can be partially characterized by a short position in the riskless security
The individual optimally holds portfolio A which can be partially characterized by a long position in the riskless security.
None of the above.
The risk-free security has a beta equal to ________ , while the market portfolio's beta is equal to _______.
more than one ; one
less than one; one
zero; one
less than zero; more than zero
Chapter 10 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 10 - Prob. 1PSCh. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Prob. 4PSCh. 10 - Prob. 5PSCh. 10 - Prob. 6PSCh. 10 - Prob. 7PSCh. 10 - Prob. 8PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PS
Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PSCh. 10 - Prob. 13PSCh. 10 - Prob. 14PSCh. 10 - Prob. 15PSCh. 10 - Prob. 16PSCh. 10 - Prob. 17PSCh. 10 - Prob. 18PSCh. 10 - Prob. 19PSCh. 10 - Prob. 1CPCh. 10 - Prob. 2CPCh. 10 - Prob. 3CPCh. 10 - Prob. 4CPCh. 10 - Prob. 5CPCh. 10 - Prob. 6CPCh. 10 - Prob. 7CPCh. 10 - Prob. 8CP
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- The Arbitrage Pricing Theorem states that:a)If arbitrage opportunities do not exist then the returns of all assets are driven by a set of common factors.b)Arbitrage portfolios are impossible.c)The expected return of any arbitrage portfolio is zero.d)The common constant factor is the risk-free assetarrow_forwardWhich one of the following is a property of a pure arbitrage portfolio?a. Negative investment.b. Zero return.c. Positive systematic risk.d. Zero total risk.arrow_forwardThe beta of a market-neutral portfolio is zero. O True O Falsearrow_forward
- What is the expected return on a security with beta equal to zero? The market rate of return. Zero rate of return. A negative rate of return. The risk-free rate. None of the above.arrow_forward1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made sufficiently small. c. Is zero in the real world. d. Is the risk that investors lose because of transaction costs. Which one of the following conditions determines the investor’s overall optimal portfolio? a. The marginal ratio of substitution of the investor’s utility function must be equal to the Sharpe ratio of the optimal risky portfolio. b. The standard-deviation of the overall portfolio in minimised. c. The expected return of the overall portfolio is maximised. d. The slope of the Sharpe-ratio is equal to zero. 4. Markets can never be strong-form efficient because: a. There are too many traders in them. b. Investors are rational. c. Information is costly to acquire. d. All information is public. 5. Which one of the following is not a property of a pure arbitrage portfolio? a. Zero investment. b. Zero systematic risk. c. Positive net return. d. All of the above.arrow_forwardAn investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of:a. A dominance argument.b. The mean-variance efficient frontier.c. Arbitrage activity.d. The capital asset pricing model.arrow_forward
- We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?arrow_forwardA forward rate is the mathematical expectation of a future spot rate in risk neutral world. O True Falsearrow_forwardAccording to modern portfolio theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities is a result of O a. the separation theorem O b. covariance O c. the normal distribution assumption O d. diminishing marginal utility of incomearrow_forward
- Can the standard deviation of a portfolio be zero? Explain your answer.arrow_forwardA portfolio that is positively correlated with the market portfolio but not particularly sensitive to market risk factors would have a beta that is A. Equal to zero. B. Equal to one. C. Less than zero. D. Between 0 and 1. E. Greater than 1.arrow_forwardIn the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected excess return. (Assuming investors are risk-averse.) True or False?arrow_forward
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