CAS Exam 9 Spring 2018, Question 6
Study guide: Exam 9
Assume the following:
- Portfolios A, B, and C are well-diversified.
- The market is influenced by just two factors, X and Y.
| Portfolio | Expected Return | \beta_X |
\beta_Y |
|---|---|---|---|
| A | 15.0% | 1.0 | 0.50 |
| B | 7.5% | -0.1 | 0.25 |
| C | 13.5% | 0.3 | 0.75 |
Part a (1.25 points)
Calculate the risk-free rate and risk premiums for factors X and Y.
Part b (2.75 points)
Suppose there exists another well-diversified portfolio D with:
\beta_X = 0.2\beta_Y = 0.5- Expected return = 12%
Prove that an arbitrage opportunity exists, and construct a strategy to exploit the opportunity that returns $10,000.
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