Consider a One-Factor Economy

question 27

Multiple Choice

Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor, and portfolio B has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%, respectively. Assume that the risk-free rate is 6%, and that arbitrage opportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this strategy would be

• A) −$1,000.
• B) $0.
• C) $1,000.
• D) $2,000.

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Definitions:

Human Nature

The inherent characteristics, including ways of thinking, feeling, and acting, that all humans tend to have.

Cultural Influences

The impact of societal norms, values, and traditions on an individual's behavior, beliefs, and attitudes.

Decision Strategy

A methodology or process that individuals or organizations follow to choose among alternatives and make effective choices.

Maximizing

The strategy of seeking the best possible option or outcome among a set of choices, aiming for the highest utility or benefit.