Assume that a one-factor model describes returns and that the following two well- diversified portfolios are...
Fantastic news! We've Found the answer you've been seeking!
Question:
![Assume that a one-factor model describes returns and that the following two well- diversified portfolios are](https://dsd5zvtm8ll6.cloudfront.net/questions/2023/12/6577faa3abaea_1702408567189.jpg)
Transcribed Image Text:
Assume that a one-factor model describes returns and that the following two well- diversified portfolios are observed Portfolio Expected Returns A B 11% 5% a) Find the equation that must describe APT equilibrium returns. b) Suppose a portfolio was quoted on the market with the following information Portfolio C Expected Return b₁₁ 1.8 0.6 4% bj> 1.0 Is this an equilibrium return? If not, what arbitrage between A, B, and C would occur? (Hint: Construct a portfolio from A and B that has the same b; as C). Explain your answer. Assume that a one-factor model describes returns and that the following two well- diversified portfolios are observed Portfolio Expected Returns A B 11% 5% a) Find the equation that must describe APT equilibrium returns. b) Suppose a portfolio was quoted on the market with the following information Portfolio C Expected Return b₁₁ 1.8 0.6 4% bj> 1.0 Is this an equilibrium return? If not, what arbitrage between A, B, and C would occur? (Hint: Construct a portfolio from A and B that has the same b; as C). Explain your answer.
Expert Answer:
Answer rating: 100% (QA)
The onefactor model which is used in the Arbitrage Pricing Theory APT assumes that the returns on a security can be described by the following linear ... View the full answer
Related Book For
Quantitative Investment Analysis
ISBN: 978-1119104223
3rd edition
Authors: Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle
Posted Date:
Students also viewed these finance questions
-
Current segmentation & Target market OF AQUARIUS SPORTS DRINK (with market/share/sales information) PROVIDE REFERENCES AND IN TEXT CITATION.
-
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...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Consider a random walk consisting of equi-probable p = q = 1/2 steps in left or right directions. However the step length at ith step is given by e-, i = 1,2,3..... N, with > 0 a constant. Calculate...
-
A list of terms and another list of definitions and examples are presented below. Make a list numbered 1 through 5 and match the letter of the most directly related definition or example with the...
-
The Big Five is the dominant taxonomy of personality; other taxonomies include the Myers-Briggs Type Inventory and Hollands RIASEC model.
-
On September 30, 2009, Ericson Company negotiated a two-year, 1,000,000 dudek loan from a foreign bank at an interest rate of 2 percent per year. It makes interest payments annually on September 30...
-
In the following figure, a consumer is initially in equilibrium at point C. The consumers income is $ 400, and the budget line through point C is given by $ 400 $ 100X + $ 200Y. When the consumer is...
-
Select all that apply What information appears on the statement of retained earnings? (Select all that apply.) ending balance of retained earnings cash paid during the accounting period dividends...
-
On August 31, 2021, Claresview Company had a cash balance per its books of $26,030. The bank statement on that date showed a balance of $17,100. A comparison of the bank statement with the Cash...
-
Student Name: Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone,...
-
Spitfire Company makes and sells three products: A, B, and C. The following data relate to these products: A B Demand in units Selling price per unit 110 100 90 $180 $210 $195 Raw material costs per...
-
NCF & Partners (NCF) is a firm of CPAslocated in Whitby that has been in business for 20 years. NCF's revenue has declined steadily over the past few years. The partners are looking for ways...
-
Task 4.2Written report Describe how you will present the menu to customers, for example, folders, covers, boards or binding. Include details of colour schemes, pictures, icons, logos, symbols and...
-
The American company "Amazonian", leader in food distribution, is starting operations in Brazil. They just hired a group of new managers who will lead several branches of the company in different...
-
1; Assume you are in charge of fundraising for an organization on your campusa social fraternity or sorority, a business fraternity, or any other such organization. It is your job to identify a...
-
15. Paid $900 for miscelaneous supplies on December 20. Supplies are expensed upon purchase. What would the Journal Entry for this be?
-
You are planning to purchase your first home five years from today. The required down payment will be $50,000. You currently have $20,000. but you plan to contribute $500 each quarter to a special...
-
One of the most important questions in financial economics is what factors determine the cross-sectional variation in an asset's returns. Some have argued that book-to-market ratio and size (market...
-
You are using the following three criteria to screen potential acquisition targets from a list of 500 companies: Fraction of the 500 Companies...
-
Kenneth McCoin, CFA, is a fairly tough interviewer. Last year, he handed each job applicant a sheet of paper with the information in the following table, and he then asked several questions about...
-
14. Assume in problem 12 that the city reports the work as a capital asset. Which ofthe following is true? a. Depreciation is not recorded because the city has no cost. b. Depreciation is not...
-
7. Which of the following is true for the Year 2 government-wide financial statements? a. Both expense and liability will be zero. b. Both expense and liability will be $110,000. c. Expense will be...
-
10. What liability should the city report on government-wide financial statements at the end ofYear 1? a. It depends on whether the employees work at governmental activities or business-type...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App