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Consider the following data for a one-factor economy.




1. Consider the following data for a one-factor economy. All portfolios;are well diversied.;Portfolio E(r), % Beta;A 12 0.6;B 23 1.1;T-bill 3 0;a. Would an arbitrage opportunity exist in this economy? If so, what would be;an arbitrage strategy?;b. Now suppose that portfolio B has beta of 1.1 and expected return of 23 percent;but is not well{diversied. Would an arbitrage opportunity exist? Why? If so, what;would be the arbitrage strategy?;2) The pension plan will pay a client $6, 000 semiannually for a 12-;year period. The rst payment will come in exactly three years. The pension fund;wants to immunize its position.;a. What is the duration of its obligation to the client? The current annual interest;rate is 8 percent.;b. If the plan uses 5-year and 15-year zero-coupon bonds to construct the;immunized position, how much money received from the sale of the level annuity;ought to be placed in each bond?


Paper#25086 | Written in 18-Jul-2015

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