Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The S&P500 expected return is 20%, and 3 Month T-bill rate is 2% . IBM has an expected return of 19% and a systematic risk

The S&P500 expected return is 20%, and 3 Month T-bill rate is 2%.

IBM has an expected return of 19% and a systematic risk of beta =0.4

SQ has an expected return of 31% and a systematic risk of beta=1.6

1. What are alphas for each stock?

2. Based on alphas, we should buy(IBM/SQ) _____________ and short sell(IBM/SQ) __________________.

3. What are the reward-to-beta ratios for each stock?

4. Based on the ratios, we should buy(IBM/SQ) ______________ and short sell(IBM/SQ) _______________.

5. Build an arbitrage portfolio by: (answer the weight for each asset)

The portfolio's arbitrage return would be ____________.

Step by Step Solution

3.31 Rating (166 Votes )

There are 3 Steps involved in it

Step: 1

1 To find the alpha for each stock we can use the formula Alpha Expected Return RiskFree Rate Beta E... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Economics

Authors: Mark Hirschey

12th edition

9780324584844, 324588860, 324584849, 978-0324588866

More Books

Students also viewed these Finance questions

Question

2. Use different groups for different subjects.

Answered: 1 week ago