Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 4

Multiple Choice

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } \text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \\\hline \mathbf { X } & - 0.55 & 1.2 \\\mathbf { Y } & - 0.10 & 0.85 \\\mathbf { Z } & 0.35 & 0.5\end{array}$$
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. What is the net arbitrage profit?

• A) $8
• B) $5
• C) $7
• D) $12
• E) $15

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Definitions:

Average Inventory

The mean value of inventory within a specific period of time, calculated to assess the amount of stock a business typically holds.

Acid-test Ratio

A stringent measure of liquidity that assesses a company's ability to cover its current liabilities with its most liquid assets, excluding inventory.

Receivables

Amounts due from individuals and other companies.

Vertical Analysis

A financial statement analysis method that expresses each item within a statement as a percentage of a base figure, facilitating comparison across periods.