Question

There are two portfolios A and B, which you think capture macroeconomic risks. Denote the excess returns of these portfolios by RA and Rg. Consider a two-factor model specification: Rp = a + BARA + BB. R$ + e which implies that in expectation: E[R] = a; + BA.E[RA] + BB.E[RE]. There are two individual stocks x,y: 0.8 1.4 E[R] 6% 9%

Answer 1

Solution. Given Expression Res= dit Pai R+ Bei Rat ei A ) let us call EERAJ as A and E[RB] as B for simplicity we have the equation E Cre) = at BA * AtBB*B How Stock y' we have cre) = 67, BA =0.8, BB 2018, 20 50 420t0_44748 6 = 0+0.8A +0.8B -> 0 HOV stock 'y' we have E Cre) = 94., BA=0,BB = 1.4 azo SO °/9= 0+0A +148-> ☺ from Equation ③ we get 1.4 *B=9 B=6.43% therefore -put ①, weget the dad value of 'B en Equation 6= 0.8*A + 0.8*6.43 Hz 1.077 part: B) Given d=0, BA = 1-7, BB=0.5 A=10WB= 6.43%.

we get 717 * 1.07 +0.5*6.43 Ev Cre) = 2+ BA* A+ BB*B = EV Cre)= 5.03%. partic) In this Equation we need to bind x la positive foo) regetive Ew Cre) = 19%, BA = 1.3, BB = 2.5, A=1.07%, B= 6.43% we get EwCre) = a + BA* A + BB* B = a + 1.3*1.07 +2.5*6.43 az 17-17.466 a= -0.466 in the Stock ar giving a negetive 'd', which means it the stock es held, it will give negetive return. The best option as to short or sell the stock
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