An Arbitrage Portfolio Exists,including an Asset a with a Total $10.1 \%$

question 12

Multiple Choice

An arbitrage portfolio exists,including an asset A with a total market value of $60 000 and 100 other assets with a combined market value of $850 000.Assume that asset A is mispriced,with a pricing error of 17%,while the remainder of the assets are priced correctly according to the factor structure.What is the arbitrage portfolio pricing error?

• A) \( 10.1 \% \)
• B) \( 94.5 \% \)
• C) \( 1.1 \% \)
• D) \( 11.2 \% \)

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Definitions:

Equipment

Tangible property used in the operations of a business, such as machinery and tools, which are not intended for sale.

Incremental Borrowing Rate

The interest rate a company would have to pay if it borrows funds, used as a benchmark in lease agreements to calculate the present value of minimum lease payments.

Balance Sheet

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time.

Liability

Financial obligations or debts owed by a business to others, which must be settled over time through the transfer of economic benefits.