11. Assume we are in the Fama-French world. The expected returns on RM, SMB, and HML...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
11. Assume we are in the Fama-French world. The expected returns on RM, SMB, and HML are 12%, 10%, and 8% respectively. The risk free rate is 2%. There is a well-diversified portfolio, A, whose factor loadings on the three factors are 0.6, 1.1, and -0.5 respectively. Based on fundamental analysis, if you buy today, you are forecasting portfolio A to earn 20%. What the expected return of portfolio A given Fama-French asset pricing model? Is there an arbitrage opportunity? Show clearly if portfolio A is underpriced or overpriced or correctly priced. If A is mispriced, clearly explain how an investor can take advantage of the arbitrage opportunity. Specifically, give details about the long-short arbitrage portfolio: what portfolio to Buy and what portfolio to Sell. If there are multiple portfolios that go into the long side and the short side, please give all the components and the $ you put each component. What is the expected return on the long portfolio, the expected return on the short portfolio, and the arbitrage return of long-short portfolio? What is the arbitrage profit (= risk-free profit) if you take a long position of $100 million and a short position of $100 million? 11. Assume we are in the Fama-French world. The expected returns on RM, SMB, and HML are 12%, 10%, and 8% respectively. The risk free rate is 2%. There is a well-diversified portfolio, A, whose factor loadings on the three factors are 0.6, 1.1, and -0.5 respectively. Based on fundamental analysis, if you buy today, you are forecasting portfolio A to earn 20%. What the expected return of portfolio A given Fama-French asset pricing model? Is there an arbitrage opportunity? Show clearly if portfolio A is underpriced or overpriced or correctly priced. If A is mispriced, clearly explain how an investor can take advantage of the arbitrage opportunity. Specifically, give details about the long-short arbitrage portfolio: what portfolio to Buy and what portfolio to Sell. If there are multiple portfolios that go into the long side and the short side, please give all the components and the $ you put each component. What is the expected return on the long portfolio, the expected return on the short portfolio, and the arbitrage return of long-short portfolio? What is the arbitrage profit (= risk-free profit) if you take a long position of $100 million and a short position of $100 million?
Expert Answer:
Related Book For
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...
-
How does the range of hFE (Fig. 3.23j, normalized from hFE = 100) compare with the range of hfe (Fig. 3.23f) for the range of IC from 0.1 to 10 mA?
-
Bess, a widow, died in October 2016. Her gross estate, which totaled $7 million, included a $100,000 life insurance policy on her life that she gave away in 2014. The taxable gift that arose from...
-
It is election day and 1800 voters vote in their precincts library during the 10 hours the polls are open. On average, there are 15 voters in the library and they spend on average 5 minutes in the...
-
How would the primordial helium content of the universe have been affected if the present cosmic background radiation temperature was \(27 \mathrm{~K}\) instead of \(2.7 \mathrm{~K}\) ? What about...
-
On September 24, 2007, Miguel Carcamo was going through his mail. For some reason, Miguel had not yet received his bank statement, which he usually received at the beginning of each month. Although...
-
7. In each of the following scenarios, a through d, determine whether the following is a microeconomic or macroeconomic issue and WHY. a. Dell computers announces that it will raise the price of its...
-
Persuasive Messaging As team lead in a company, you have been asked to recruit employees to participate in a charitable event using a flayer along with a brief statement of why people should...
-
Describe the legal, political and cultural factors that could impact Lays Ketchup Chips international marketing plan such as political stability and business climate, religion and culture, tax...
-
The Chuck Taylor All Star shoe was introduced under the name Chuck Taylor in 1923. What was the CPI of that year in October, find out hhereere? Based on this information find the introductory price...
-
The average daily sales of a company are ` 5 lac. The company normally keeps a cash balance of ` 80000. If the weighted operating cycle of the company is 45 days, calculate its working capital.
-
In the code below, you will find 5 errors. Clearly identify each error and how you resolve each error. (1 point per error) var $ = function (id) { 67890 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24...
-
4. (25 points) Consider the following model for blurring images: i-jl=2, |i- j = 1, Bij _i=j, 0 otherwise. Additionally, assume the periodic boundaries of your image. Blur a matlab-provided demo...
-
Two solid steel shafts are fitted with flanges that are then connected by bolts as shown. The bolts are slightly undersized and permit a 1.5? rotation of one flange with respect to the other before...
-
Find the equation of the plane passing through the points P 5,4,3 ,Q 4,3,1 and R 1,5,4
-
Review the international parity conditions. Which ones do you think are likely to exist and which are less likely to be valid? During a global recession, do you think they are less or more likely to...
-
Hoy plc has a profit before interest and taxes of 900,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 17 per cent, and the corporate tax rate...
-
Explain the concept of synergy and provide examples of sources of synergy. Where does synergy come from? Is it possible that a merged company will not benefit from synergies? Discuss.
-
Company data for dividend per share (DPS), earnings per share (EPS), share price, and price-to-earnings ratio (P/E) for the most recent five years are presented in Exhibit 10-9. In addition,...
-
The best model to use when valuing a young dividend-paying company that is just entering the growth phase is most likely the: A. Gordon growth model. B. Two-stage dividend discount model. C....
-
For the next three years, the annual dividends of a stock are expected to be 2.00, 2.10, and 2.20. The stock price is expected to be h20.00 at the end of three years. If the required rate of return...
Study smarter with the SolutionInn App