there is something i am not quite understanding. According to Schweser (the arbitrage law, followed by an example):
"Risk free portfolios: When securities with uncertain payoffs are combined in a portfolio such that the portfolio has a certain payoff, the portfolio return should equal the risk free rate."
"Portfolio with a certain payoff, consisting of two assets, each with uncertain payoffs.
Arbitrage action: Borrow at risk free rate, form portfolio, earn a return greater that risk free rate, repay risk free loan"
if the portfolio has a certain payoff, that payoff is the RFR. So how could i arbitrage a portfolio that returns RFR by borrowing at RFR? am i getting payoff and return confused? i need advice...
"Risk free portfolios: When securities with uncertain payoffs are combined in a portfolio such that the portfolio has a certain payoff, the portfolio return should equal the risk free rate."
"Portfolio with a certain payoff, consisting of two assets, each with uncertain payoffs.
Arbitrage action: Borrow at risk free rate, form portfolio, earn a return greater that risk free rate, repay risk free loan"
if the portfolio has a certain payoff, that payoff is the RFR. So how could i arbitrage a portfolio that returns RFR by borrowing at RFR? am i getting payoff and return confused? i need advice...