INVESTMENTS Chapter 7 arbitrage Pricing Theory
INVESTMENTS Arbitrage Arbitrage Pricing Theory Pricing Theory Chapter 7 Chapter 7
INVESTMENTS Arbitrage pricing theor Arbitrage - arises if an investor can construct a zero investment portfolio with a sure profit Since no investment is required, an investor can create large positions to secure large levels of profit In efficient markets, profitable arbitrage opportunities will quickly disappear
INVESTMENTS Arbitrage Pricing Theory Arbitrage Pricing Theory Arbitrage - arises if an investor can construct a zero investment portfolio with a sure profit Since no investment is required, an investor can create large positions to secure large levels of profit In efficient markets, profitable arbitrage opportunities will quickly disappear
INVESTMENTS Arbitrage Example from Text Current Expected Standard Stock PriceS Return 0 evo 10 25.0 2958 ABCD 20.0 33.91 32.5 48.15 22.5 8.58
INVESTMENTS Current Expected Standard Stock Price$ Return% Dev.% A 10 25.0 29.58 B 10 20.0 33.91 C 10 32.5 48.15 D 10 22.5 8.58 Arbitrage Example from Text Arbitrage Example from Text pp. 308 pp. 308 -310
INVESTMENTS Arbitrage portfolio ean S D. Correlation Portfolio A.B.C25.83 094 22.25 8.58
INVESTMENTS Mean S.D. Correlation Portfolio A,B,C 25.83 6.40 0.94 D 22.25 8.58 Arbitrage Portfolio Arbitrage Portfolio
INVESTMENTS Arbitrage action and retl E Ret D St. dev Short 3 shares of d and buy l of a, b& c to form p You earn a higher rate on the investment than you pay on the short sale
INVESTMENTS Arbitrage Action and Returns Arbitrage Action and Returns E. Ret. St.Dev. * P * D Short 3 shares of D and buy 1 of A, B & C to form P You earn a higher rate on the investment than you pay on the short sale