Question: Portfolio Expected Return bp bp A 15% 1.0 0.6 B 14% 0.5 1.0 C 10% 0.3 0.2 (i) Calculate the expected return for portfolio D,

Portfolio Expected Return bp bp A 15% 1.0 0.6 B 14% 0.5 1.0 C 10% 0.3 0.2 (i) Calculate the expected return for

Portfolio Expected Return bp bp A 15% 1.0 0.6 B 14% 0.5 1.0 C 10% 0.3 0.2 (i) Calculate the expected return for portfolio D, which consists of weights of 1/3 in portfolios A, B and C. (ii) Based on the APT, if there are only two factors that influence returns, then the expected returns on diversified portfolios should satisfy the equation E[Rp] = Ao+bp + bp Find the values of the factor prices. (iii) Use the expected portfolio return equation to find the expected return for portfolio D. Is this answer the same as in (i)? bp (iv) Suppose that you can construct another portfolio, E, which has 0.6 and bp = 0.6. This portfolio has an expected return of 15%. Show that there is an opportunity for arbitrage profits. = Portfolio Expected Return bp bp A 15% 1.0 0.6 B 14% 0.5 1.0 C 10% 0.3 0.2 (i) Calculate the expected return for portfolio D, which consists of weights of 1/3 in portfolios A, B and C. (ii) Based on the APT, if there are only two factors that influence returns, then the expected returns on diversified portfolios should satisfy the equation E[Rp] = Ao+bp + bp Find the values of the factor prices. (iii) Use the expected portfolio return equation to find the expected return for portfolio D. Is this answer the same as in (i)? bp (iv) Suppose that you can construct another portfolio, E, which has 0.6 and bp = 0.6. This portfolio has an expected return of 15%. Show that there is an opportunity for arbitrage profits. =

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