Question
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 ____________.
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Managerial Economics
Authors: Mark Hirschey
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