question archive Suppose that a portfolio K, is believed to have a positive alpha of 1
Suppose that a portfolio K, is believed to have a positive alpha of 1
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Suppose that a portfolio K, is believed to have a positive alpha of 1.4. You used the benchmark portfolio (market portfolio) to hedge away the systematic risk and further, you added a position in the risk-free asset to convert portfolio K into a zero-beta, zero-net investment portfolio. The resulting arbitrage portfolio weights in the benchmark portfolio and risk-free asset are Select one: O a. -14 and -0.4, respectively O b.-1.4 and 0.4, respectively c. -14 and -0.4, respectively O d. 1.4 and -0.4, respectively
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The resultant arbitrage portfolio weight in the benchmark portfolio will be equivalent to the Alpha which has been created by the company in the risky Assets and it will be trying to hedge away with the risk free asset in order to have a better arbitrage bbecause the investor want to convert it to zero beta and zero net investment and hence he will be trying to take alternative positions.
All the other options are false.
Correct answer will be option (D) 1.4 and -.40.
