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:

Civil Inattention

A social behavior where individuals in public spaces acknowledge each other's presence but choose not to engage in deep social interaction.

Environmental Sociologists

Researchers who study the interactions between societies and their natural environments, focusing on issues like pollution, sustainability, and environmental justice.

Human-Made Environment

Environments and settings that have been created or significantly altered by human activity, as opposed to natural environments.

Wilderness

Natural areas left undisturbed by human development, where ecosystems operate freely without significant human influence.