ed k Rit = E(Rit) + Bij 11 + Biz 21 Here: Rit is the return...

Transcribed Image Text:

ed k Rit = E(Rit) + Bij 11 + Biz 21 Here: Rit is the return on Security / at Time t. Fit and F2t are market factors with zero expectation and zero covariance. In addition, assume that there is a capital market for four securities, and the capital market for these four assets is perfect in the sense that there are no transaction costs and short sales (i.e., negative positions) are permitted. The characteristics of the four securities follow: t Security 1 B2 E(R) 1 1.550 ces 2.050 25% 2 .775 2.825 25 3 1.550 .775 15 4 1.800 .900 10 a. Construct a portfolio containing (long or short) Securities 1 and 2, with a return that does not depend on the market factor, Ft, in any way (Hint. Such a portfolio will have B = 0.) (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.) a-1.Compute the expected return and coefficient for this portfolio. (Do not round intermediate calculations and enter your expected return answer as a percent. Leave no cells blank - be certain to enter "O" wherever required.) b. Construct a portfolio containing Securities 3 and 4, with a return that does not depend on the market factor, Ft, in any way. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 1 decimal, e.g., 32.1.) b-1.Compute the expected return and 2 coefficient for this portfolio. (Do not round ed k Rit = E(Rit) + Bij 11 + Biz 21 Here: Rit is the return on Security / at Time t. Fit and F2t are market factors with zero expectation and zero covariance. In addition, assume that there is a capital market for four securities, and the capital market for these four assets is perfect in the sense that there are no transaction costs and short sales (i.e., negative positions) are permitted. The characteristics of the four securities follow: t Security 1 B2 E(R) 1 1.550 ces 2.050 25% 2 .775 2.825 25 3 1.550 .775 15 4 1.800 .900 10 a. Construct a portfolio containing (long or short) Securities 1 and 2, with a return that does not depend on the market factor, Ft, in any way (Hint. Such a portfolio will have B = 0.) (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.) a-1.Compute the expected return and coefficient for this portfolio. (Do not round intermediate calculations and enter your expected return answer as a percent. Leave no cells blank - be certain to enter "O" wherever required.) b. Construct a portfolio containing Securities 3 and 4, with a return that does not depend on the market factor, Ft, in any way. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 1 decimal, e.g., 32.1.) b-1.Compute the expected return and 2 coefficient for this portfolio. (Do not round