2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets...
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2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free. Asset Factor 1 sensitivity Factor 2 Sensitivity Return A 1.0 0.5 14% B 0.5 1.0 18% (1) What are the risk premiums of factor portfolio 1 and 2? (15 marks) (2) A well-diversified risky asset has 3₁ = 1.5 and ₂ = 0.5. What is its arbitrage-free expected return? (10 marks) (3) If the forecasted return of asset in (2) is 14%. Indicate an arbitrage transaction that could be used to profit from this pricing situation. (15 marks) 2. Consider a two-factor economy. The riskfree rate is 4%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free. Asset Factor 1 sensitivity Factor 2 Sensitivity Return A 1.0 0.5 14% B 0.5 1.0 18% (1) What are the risk premiums of factor portfolio 1 and 2? (15 marks) (2) A well-diversified risky asset has 3₁ = 1.5 and ₂ = 0.5. What is its arbitrage-free expected return? (10 marks) (3) If the forecasted return of asset in (2) is 14%. Indicate an arbitrage transaction that could be used to profit from this pricing situation. (15 marks)
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a Let factor portfolio risk premums for factor 1 and 2vbe RP1 and RP2 respectively By using Mult... View the full answer
Related Book For
Fundamentals of Investments
ISBN: 978-0132926171
3rd edition
Authors: Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey
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