Question

You complete an analysis of the fund DQXQ, and you expect an excess return (return risk free) of 15.5%. Your expectation of the excess return of the market is 13.3%, and the beta of DQXQ is 1.3 You want to create an arbitrage portfolio to take advantage of the mispricing with the following characteristics (Wp. Wmkt, Wrf, alpha). O 100%: 130%; borrow: 30%: -1.79% O 100%; -130%; lend: 30%: 1.79% O 100%; -130%; lend: 30%: -1.79% 100%; -130%; lend: 30%: 2.20% O 100% : 130%; borrow; 30%: 2.20%

Answer 1

The student's query involves the creation of an arbitrage portfolio to capitalize on the expected excess return difference between the fund DQXQ and the market return, using the concept of beta and adjusting portfolio weights to achieve this.

Step-by-step explanation:

The student is asking about creating an arbitrage portfolio based on the expected excess return of a particular fund (DQXQ) compared to the expected excess return of the market, and the beta value of the fund. Arbitrage involves leveraging the difference in prices or returns between two or more markets in order to create a risk-free profit. Given the information that the student expects a 15.5% excess return on DQXQ and a 13.3% excess return on the market with a beta of 1.3 for DQXQ, they are considering how to structure their portfolio weights (Wp, Wmkt, Wrf, alpha) to exploit mispricing. The student is provided with various portfolio weight options that involve adjusting the proportions of the portfolio invested in DQXQ, the market index, and the risk-free asset, including borrowing or lending a percentage of the portfolio value.