Question

A zero-investment portfolio with a positive alpha could arise if: a. The expected return of the portfolio equals zero. b. The capital market line is tangent to the opportunity set. c. The Law of One Price remains unviolated. d. A risk-free arbitrage opportunity exists.

Answer 1

d. A risk-free arbitrage opportunity exists.

Step-by-step explanation:

A zero-investment portfolio refers to a portfolio of assets which all the investments its contains has a collective net value that is zero which is obtained when there is a simultaneously purchasing securities and selling equivalent securities.

Alpha refers to the active return on an investment. This implies that when a zero-investment portfolio has a positive alpha, its active return is positive. This can only occur when there is a risk-free arbitrage opportunity.

A risk-free arbitrage refers to the opportunity to make some profit with no capital investment.

Therefore, the correct option is d. A risk-free arbitrage opportunity exists.