Homework Answers
Ans-1) In Single Index Model, the asset return is influenced by market which is reflected by beta and the value of alpha shows the excess returns. If the value of alpha is zero and beta is in negative, that would mean the market is moving down (due to negative beta) and there are no abnormal rerturns as well( due to alpha zero). Hence, it would not make sense for the investor to invest as there is a high risk with very low or no returns.
Ans-2) Under Efficient Market Hypothesis , a financial market to be efficient means that the asset prices are incorporated with all the information relating to the actual value of the asset. The more the quantity and quality of information is there, more the maket is efficient. In other words all the traders have the same information regarding the value of the asset (information is depicted by asset price).
This sense of efficiency means that the future prices of the assets are neither undervalued nor overvalued. It is not possible to outperform the market and no opportunity for arbitrage and gain above market returns.
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Question 1. Consider the single index model. Suppose an asset has a negative beta and an...
Outline the general regression equation for a single index model and, from this, outline the expected...
Outline the general regression equation for a single index model and, from this, outline the expected return-beta relationship. Explain what is meant by the Security Characteristic Line, making reference to the alpha and beta estimates.
Question 22 (Mandatory) (3.2 points) Which of the following is the asset pricing theory based on...
Question 22 (Mandatory) (3.2 points) Which of the following is the asset pricing theory based on a beta, a measure of market risk? O Capital asset pricing model Behavioral asset pricing model Efficient markets asset pricing model Efficient market hypothesis Question 23 (Mandatory) (3.2 points) Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? O Security market line Stock market line O Probability market line O Market risk...
Pinulo retums? 1 0 capital asset pricing model given historical data 2. Consider Table 1. (%)...
Pinulo retums? 1 0 capital asset pricing model given historical data 2. Consider Table 1. (%) 3.77 Table 1 Summary Statistics Alpha, Beta, Expected Return and Variance a/c to the Stocks Sample Single Index Model Covariance Residual and Return Alpha Beta with Market Expected Variance Variance Market (%) (%) Return (%) (%) 3.60 3.59 4.80 Market 4.20 0.00 8.70 (a) Consider Table 1. Using the single index model, calculate beta and alpha for stocks 1 and 2. Interpret your findings....
6. The CAPM model introduces the concept of Beta as a measure of riskiness. If the...
6. The CAPM model introduces the concept of Beta as a measure of riskiness. If the Beta for a firm 1.3, what does that tell us about the stock of that firm? 7. Some stock analysts and stock market analysts say that optimism is one of the most important factors for individual corporate stocks and for the stock market as a whole. What does this mean? Explain why you agree or disagree. 8. Explain briefly why volatility is considered a...
Please choose a letter answer and explain the answer please. According to the CAPM the expected return of a zero beta s...
Please choose a letter answer and explain the answer please. According to the CAPM the expected return of a zero beta security is . the market rate of return zero a negative rate of return the risk-free rate The arbitrage pricing theory differs from the capital asset pricing model because the APT . places more emphasis on market risk minimizes the importance of diversification recognizes multiple unsystematic risk factor recognizes multiple systematic risk factors If you believe in...
Assume security returns are generated by the single-index model. R 1 =a 1 + beta 2...
Assume security returns are generated by the single-index
model. R 1 =a 1 + beta 2 R M +e 1 where R 1 is the excess return
for security and R N market’s excess returnThe risk-free rate is 4%
Suppose also that there are three securities A8and characterized by
the following data!
Saved Assume that security returns are generated by the single-index model R; - ei + BiRM + ej where is the excess return for security i and Ry...
9 Question 21 (1 point) ✓ Saved In the single index model we assume which of...
9 Question 21 (1 point) ✓ Saved In the single index model we assume which of the following? 1 12 ✓ 14 15 The higher a stock's standard deviation, the higher its expected return. The higher a stock's standard deviation, the higher its Beta. 17 18 A stock's return is uncorrelated to the market. ! 20 21 Firm specific risk is correlated to the market. A stock's systematic risk is unpriced. 23 24 None of the above Question 22 (1...
Question 4(14 marks) What is the risk premium of a zero-beta stock?Does this mean you can...
Question 4(14 marks) What is the risk premium of a zero-beta stock?Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the risk-free asset? (4 marks) Assume all investors want to hold a portfolio that, for a given level of volatility, has the maximum possible expected return. Explain why, when a risk-free asset exists, all investors will choose to hold the same...
it says to answer 3 parts in this question. so A,B and C please 1. Answer...
it
says to answer 3 parts in this question. so A,B and C please
1. Answer three parts of the following question. Your answer for each part should be no longer than two pages long A. Compare and contrast the capital asset and arbitrage pricing theory models. B. Use the single index model to derive an econometric model of the capital asset pricing model. C. A fully diversified portfolio will have no risk. True or false? Explain your answer. D....
sorry the question says answer 3 out of the 5. C,D,E please wg uestIon. TOur answer...
sorry the question says answer 3 out of the 5. C,D,E please
wg uestIon. TOur answer or each part should be no longer, than two pages long. (a) How does the security market line differ from the capital market line? Explain your answer. (b) Compare and contrast the minimum variance frontier with the efficient frontier. Can it ever be the case that the minimum variance and efficient frontiers are the same? Explain your answer. (c) Compare and contrast Treynor and...
Question 22 (Mandatory) (3.2 points) Which of the following is the asset pricing theory based on a beta, a measure of market risk? O Capital asset pricing model Behavioral asset pricing model Efficient markets asset pricing model Efficient market hypothesis Question 23 (Mandatory) (3.2 points) Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? O Security market line Stock market line O Probability market line O Market risk...
Pinulo retums? 1 0 capital asset pricing model given historical data 2. Consider Table 1. (%) 3.77 Table 1 Summary Statistics Alpha, Beta, Expected Return and Variance a/c to the Stocks Sample Single Index Model Covariance Residual and Return Alpha Beta with Market Expected Variance Variance Market (%) (%) Return (%) (%) 3.60 3.59 4.80 Market 4.20 0.00 8.70 (a) Consider Table 1. Using the single index model, calculate beta and alpha for stocks 1 and 2. Interpret your findings....
6. The CAPM model introduces the concept of Beta as a measure of riskiness. If the Beta for a firm 1.3, what does that tell us about the stock of that firm? 7. Some stock analysts and stock market analysts say that optimism is one of the most important factors for individual corporate stocks and for the stock market as a whole. What does this mean? Explain why you agree or disagree. 8. Explain briefly why volatility is considered a...
Assume security returns are generated by the single-index
model. R 1 =a 1 + beta 2 R M +e 1 where R 1 is the excess return
for security and R N market’s excess returnThe risk-free rate is 4%
Suppose also that there are three securities A8and characterized by
the following data!
Saved Assume that security returns are generated by the single-index model R; - ei + BiRM + ej where is the excess return for security i and Ry...
9 Question 21 (1 point) ✓ Saved In the single index model we assume which of the following? 1 12 ✓ 14 15 The higher a stock's standard deviation, the higher its expected return. The higher a stock's standard deviation, the higher its Beta. 17 18 A stock's return is uncorrelated to the market. ! 20 21 Firm specific risk is correlated to the market. A stock's systematic risk is unpriced. 23 24 None of the above Question 22 (1...
it
says to answer 3 parts in this question. so A,B and C please
1. Answer three parts of the following question. Your answer for each part should be no longer than two pages long A. Compare and contrast the capital asset and arbitrage pricing theory models. B. Use the single index model to derive an econometric model of the capital asset pricing model. C. A fully diversified portfolio will have no risk. True or false? Explain your answer. D....
sorry the question says answer 3 out of the 5. C,D,E please
wg uestIon. TOur answer or each part should be no longer, than two pages long. (a) How does the security market line differ from the capital market line? Explain your answer. (b) Compare and contrast the minimum variance frontier with the efficient frontier. Can it ever be the case that the minimum variance and efficient frontiers are the same? Explain your answer. (c) Compare and contrast Treynor and...
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