Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Question

Question

Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) = 14.0%. If the economy has only one factor, and βA = 1 while βB = 1.2, what must be the risk-free rate?

business finance

Add a comment Improve this question Transcribed image text

Answer 1

Answer #1

Expected return=risk free rate+beta*(market rate-risk free rate)

12.8=Rf+1*(Rm-Rf)

Rm=12.8%

Also:

14=Rf+1.2*(Rm-Rf)

14=1.2*Rm-0.2Rf

14=(1.2*12.8)-0.2Rf

Rf=(15.36-14)/0.2

=6.8%=risk free rate

Add a comment

Answer 2

Similar Homework Help Questions

An investor holds two well-diversified portfolios on US securities. The expected return on portfolio A is...

An investor holds two well-diversified portfolios on US securities. The expected return on portfolio A is 13% and the expected return on portfolio B is 8%, and βA = 1 and βB = 0.7. What should be the risk-free rate according to the CAPM?
Consider a one factor economy where the risk free rate is 5%, and portfolios A and...

Consider a one factor economy where the risk free rate is 5%, and portfolios A and B are well diversified portfolios. Portfolio A has a beta of 0.6 and an expected return of 8%, while Portfolio B has a beta of 0.8 and an expected return of 10%. Is there an arbitrage opportunity in this economy? If yes, how could you exploit it?
Consider the following data for a one-factor economy. All portfolios are well-diversified. Portfolio E(r) Beta A...

Consider the following data for a one-factor economy. All portfolios are well-diversified. Portfolio E(r) Beta A 12% 1.2 F 6% 0.0 Suppose that another portfolio, portfolio E, is well-diversified with a beta of 0.6 and expected return of 10%. Would an arbitrage opportunity exist? If so, what would the arbitrage strategy be? I need to solve this for a problem set and I am really confused as to how to go about it. Any explanations and answers would be appreciated.

Question 6 0/5 pts Assume that both X and Y are well-diversified portfolios and the risk-free...

Question 6 0/5 pts Assume that both X and Y are well-diversified portfolios and the risk-free rate is 4%. Portfolio Expected Return 8.75% 10% Beta 0.75 1.00 If you wish to take a $100,000 arbitrage position, how much money would you o $1,000.00 O$500.00 O $750.0o O $250.00
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well diversified.Portfolio Beta on M1 Beta on M2 Exp.Return (%)A 1.6 2.5 31B. 2.4. -0.7. 12What is the expected return–beta relationship in this economy?Expected return–beta relationship E(rP) =5.00 % + ........ βP1 + ........βP2*The answers are not 5.014 and 7.191
Please show all equations and work as needed. Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation,...

Please show all equations and work as needed. Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation, would you conclude that there exists an arbitrage opportunity involving the described securities? If your answer is affirmative, show the strategy that you would use to exploit such arbitrage. If your answer is negative, show why that is the case Assume that A and B are two...

Suppose that there are two Independent economic factors, F and F. The risk-free rate is 6%, and all stocks have ind...

Suppose that there are two Independent economic factors, F and F. The risk-free rate is 6%, and all stocks have independent firm specific components with a standard deviation of 36%. Portfolios A and B are both well-diversified with the following properties: Portfolio Deta on 2 Expected Return 1.2 Beta on -0.16 266 230 What is the expected return-beta relationship in this economy? Calculate the risk-free rate, and the factor risk premiums, RA and RP2, to complete the equation below. (Do...
You are given the option of choosing between three well diversified portfolios to use as the...

You are given the option of choosing between three well diversified portfolios to use as the optimal portfolio in a single index model. Information on them is given below: Portfolio Expected Return Expected Standard Deviation A .1 .05 B .12 .07 C .14 .08 (20 points) If the risk-free rate is .04, which portfolio would you choose? Why? (20 points) How, if at all, does your answer change if the risk-free rate is .06? Explain.
Suppose you are working with two factor portfolios. Portfolio 1 and Portfolio 2. The portfolios have...

Suppose you are working with two factor portfolios. Portfolio 1 and Portfolio 2. The portfolios have expected returns of 15% and 6%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A TA has a beta of 1 on the first factor and 0 on the second factor? The risk-free rate is 3%. ? 3.00% O 12.096 ? 15.0% ? 6.00%

2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets...

2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free. Asset Factor 1 sensitivity Factor 2 Sensitivity Return 1.0 0.5 0.5 1.0 14% 18% (1) What are the risk premiums of factor portfolio 1 and 2? (15 marks) (2) A well-diversified risky asset has B1-1.5 and ß2-0.5. What is its arbitrage-free expected return? (10 marks) (3) If the forecasted return of asset in (2)...

Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Homework Answers

Add Answer to:
Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Post as a guest

Earn Coins

An investor holds two well-diversified portfolios on US securities. The expected return on portfolio A is...

Consider a one factor economy where the risk free rate is 5%, and portfolios A and...

Consider the following data for a one-factor economy. All portfolios are well-diversified. Portfolio E(r) Beta A...

Question 6 0/5 pts Assume that both X and Y are well-diversified portfolios and the risk-free...

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on

Please show all equations and work as needed. Assume that A and B are two well-diversified portfolios and that the risk-free rate is 8%. PortfolioExpected Returm 1.00 18% 12% 0.50 In this situation,...

Suppose that there are two Independent economic factors, F and F. The risk-free rate is 6%, and all stocks have ind...

You are given the option of choosing between three well diversified portfolios to use as the...

Suppose you are working with two factor portfolios. Portfolio 1 and Portfolio 2. The portfolios have...

2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets...

Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Homework Answers

Add Answer to: Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...

Post as a guest

Earn Coins

Add Answer to:
Assume both portfolios A and B are well diversified, that E(rA) = 12.8% and E(rB) =...