Show that the standard CAPM should hold even if short sales are not allowed.
Answer to relevant QuestionsAssume that an asset exists with (R-bar)3 = 15% and β3 = 1.2. Further assume the security market line discussed in Problem 1. Design the arbitrage opportunity. Given the model shown below, what is the risk-free rate if the post tax equilibrium model describes returns? We have sometimes heard investment managers say, "I followed that (expletive deleted) theory and bought high-beta stocks last year and they did worse than low-beta stocks. That theory is (expletive deleted)." Is this a valid ...Referring to the results of Problem 3, illustrate the arbitrage opportunities that would exist if a portfolio called D with the following characteristics were observed: A firm has just paid (the moment before valuation) a dividend of 55¢ and is expected to exhibit a growth rate of 10% into the indefinite future. If the appropriate discount rate is 14%, what is the value of the stock?
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