Assume that a onefactor model describes returns and that the following two well diversified portfolios are...
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Assume that a onefactor 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 onefactor 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.
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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: 9781119104223
3rd edition
Authors: Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, David E. Runkle
Posted Date:
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