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Bernie John, and Ted run mutual funds
Bernie John, and Ted run mutual funds. The expected return on Bernie's portfolio is 12% while the expected return on John's portfolio is 6%. Single-factor model estimates Portfolio Factor 1 Beta Bernie 4.0 John 1.0 Ted 2.0 Suppose that the single risk factor is the market portfolio and that you can trade (buy/sell) the market portfolio. How would you form a zero beta portfolio (that is, a portfolio with a beta equal to zero) by combining Ted's portfolio and the market portfolio? Weight of -1.0 in Ted's portfolio and weight of 2.0 in the market portfolio Weight of 0.5 in Ted's portfolio and weight of 0.5 in the market portfolio Weight of -0.5 in Ted's portfolio and weight of 1.5 in the market portfolio Weight of -2.0 in Ted's portfolio and weight of 3.0 in the market portfolio
Expert Solution
weight of ted * 2 + weight of market *1 = 0
weight of Ted/weight of market = -1/2
Option A fulfils this criteria
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