-Suppose the Above Asset Is Observed in the Market Trading

question 23

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 28%.What strategy would you suggest to profit from this situation,assuming the Fama-French model 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:

Supplement

A product taken orally that contains one or more ingredients (such as vitamins or amino acids) that are intended to supplement one's diet and are not considered food.

Unsaturated Fatty Acids

Fatty acids that contain one or more double bonds between carbon atoms, which can be healthier than saturated fats and found in oils from vegetables, nuts, and fish.

Monounsaturated Fats

A type of healthy fat found in various oils and nuts that can help to lower bad cholesterol levels.

Cholesterol

A waxy, fat-like substance found in all cells of the body, necessary for making hormones, vitamin D, and substances that help digest foods.