-Suppose the Above Asset Is Observed in the Market Trading

question 7

Multiple Choice

$\begin{array}{|l|l|l|l|}\hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right) -\mathrm{R}_{\mathrm{F}}\right) } & \mathrm{SMB} & \mathrm{HML} \\\hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=1.75 & \mathrm{~s}_{\mathrm{i}}=-0.80 & \mathrm{~h}_{\mathrm{i}}=0.60 \\\hline \text { Risk premium } & 18.5 \% & 5.25 \% & 0.50 \% \\\hline\end{array}$
-Suppose the above asset is observed in the market trading with an expected return of 18%.What strategy would you suggest to profit from this situation,assuming the CAPM was the correct pricing model and the risk-free rate was 8%?

• A) buy the asset
• B) short-sell the asset
• C) buy the risk-free asset
• D) sell the market portfolio

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Definitions:

Depolarization

The process in which the resting membrane potential becomes less negative, moving towards zero, typically as a precursor to an action potential in neurons.

Plasma Membrane

The lipid bilayer that encloses the cytoplasm of a cell, regulating the entry and exit of substances in and out of the cell.

Polyspermy

The fertilization of an egg by more than one sperm, which is normally prevented in many species to ensure proper development.

Inner Cell Mass

Group of cells at one end of the blastocyst, part of which forms the body of the embryo.