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:

Mandamus

A judicial remedy in the form of an order from a court to a government official, body, or lower court, requiring them to perform a mandatory or purely ministerial duty correctly.

Natural Justice

The principle of fairness in legal processes, ensuring all parties have a fair chance to present their case.

Privative Clauses

Provisions in law that limit the ability of a court to review decisions made by administrative bodies, aiming to reduce judicial interference.

Fair Hearing

A judicial or administrative procedure that ensures an individual's rights are respected by giving them a chance to present their case and to hear and respond to any evidence against them.