Question

12. Consider a portfolio formed with debt security and equity security. Which of the following portfolio strategies would you follow when weight of debt security is less than zero and weight of equity security greater than one?

Select one:

a. Short sell equity and invest the proceed in debt

b. Borrow more money and invest in equity

c. Borrow at risk-free rate and invest in stock portfolio

d. Short sell debt security and invest the proceed in equity security

Answer 1

Short sell debt security and invest the proceed in equity security

Short selling is the trading strategy thar speculate on the decline a security or other securities price.

Here weight of debt security less than zero and weight of equity security grather than one.So that investor prefer short sell debt security and invest the proceed in equity.because equity proceed is high.

In case equity weight is less than zero and debt weight grather than one investor prefer short sell equity and invest proceed on debt security.