Beta of factor 1 = 1
Beta of factor 2 = 0
Risk free rate = 3%
E(R) = 3% + 1 * (15% - 3%) + 0 * (6% - 3%)
E(R) = 3% + 12%
E(R) = 15%
Suppose you are working with two factor portfolios. Portfolio 1 and Portfolio 2. The portfolios have...
2. Suppose there are two independent risk factors governing securities returns according to the two factor APT. The risk-free rate is 10%. The following well-diversified portfolios exist: beta with respect beta with respect Expected Return to factor 1 to factor 2 Portfolio #1 25% Portfolio #2 25% (a) What are the expected returns on each of the two risk factors in this economy? (b) Suppose another portfolio has a beta with respect to the first factor of 1, a beta...
No 4. a) Stocks have a two-factor structure. Two widely diversified portfolios have the following data. Portfolio A has average return 10% and factor betas 1.5 and 0.4, respectively, on the first and second factor. Portfolio B has average return 9% and factor betas 0.2 and 1.3, respectively, on the first and second factor. The risk free return is 2%. What are the risk premia for factors one and two? b) A firm owns a collection of illiquid assets. Returns...
Suppose that well-diversified portfolio Z is priced based on two factors. The beta for the first factor is 1.10 and the beta for the second factor is 0.45. The expected return on the first factor is 11%. The expected return on the second factor is 17%. The risk-free rate of the return is 5.2%. Use the arbitrage pricing theory relationships, what is the expected return on portfolio Z?
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?
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 7%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return A 1.8 2.1 40% B 2.0 -0.5 10% What is the risk premium for M1?
3. To apply the Arbitrage Pricing Theory to find a stock return, you consider two factor portfolios, Portfolio A and Portfolio B. A stock has a beta of 1.2 on the first factor and a beta of 0.21 on the second factor. Portfolio A and Portfolio B have expected returns of 12% and 10%, respectively. If the risk-frerate is 3%, what must the expected return on this stock be?
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.
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?
Suppose that there are two independent
economic factors, F1 and F2. The risk-free rate is 3%, and all
stocks have independent firm-specific components with a standard
deviation of 52%. Portfolios A and B are both well-diversified with
the following properties: Portfolio Beta on F1 Beta on F2 Expected
Return A 1.4 1.8 30 % B 2.4 –0.18 27 % What is the expected
return-beta relationship in this economy? Calculate the risk-free
rate, rf, and the factor risk premiums, RP1 and...
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