Question

Q2

(e) Assume for simplicity sake that one factor has been deemed appropriate to "explain" returns on stocds (0) How and there is no idiosyncratic risk. Derive the arbitrage pricing theory would you perform a test of the predictions of the capital asset pricing model given historical data (APT) model 2. Consider Tablo 1 Return and Variance a/c to the Stocks Sample Covariance Residual AlphaBeta Expected Variance and Return | with Market | Variance | (96) Return Market 3.60 4.80 2 (a) Consider Table 1. Using the single index model, calculate beta and alpha for stocks 1 and 2. Interpret (b) Consider Table 1. Using the single index model, calculate the expected return, variance of returns, (e) Consider Table i. Form an equally-weighted portfolio of stocks 1 and 2. Using the single index model, (d) Consider Table 1 . Suppose a third risky stock exists with expected return of 5% and standard deviation 7.35 5.05 3.59 3.77 0.00 Market 4.20 8.70 your findings. risk, non-market risk for stocks 1 and 2, and the covariance between the returns for stocks 1 systematic and 2. Interpret your findings. calculate the expected return and standard deviation risk of this portfolio. Sketch the set of portfolios comprised of stocks 1 and 2. risk of 3%. Further suppose stock 3 has a market beta oro. Form a portfolio of stocks l and 3, How does a portfolio of stocks 1 and 3 compare to a portfolio of stocks 1 and 2? 3. Consider Table 2. Table 2 Stock 2 Stock 3 Stock 1

Answer 1

Below is the formula for Beta.

Beta of Stock 1=7.35(3.6)/3.59=7.877