Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have
Question:
Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship:
E(RA) = (1:1)λ1 + (0:8)λ2
E(RB) = (0:7)λ1 + (0:6)λ2
E(RC) = (0:3)λ1 + (0:4)λ2
a. If λ1 = 4% and λ2 = 2%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year.
b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale.
Problems 6 and 7 refer to the data contained in Exhibit, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). (Note: You may find it useful to use a computer spreadsheet program such as Microsoft Excel to calculate your answers.)
StocksStocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
a Because no stock pays a dividend all return is due to price appreciation ER A 11x004 08x002 0044 0...View the full answer
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
