Question: Question B4 Assume that you are using a two-factor APT model, with factors A and B, to find the fair expected return on a well-diversified

Question B4 Assume that you are using a two-factor APT model, with factors A and B, to find the fair expected return on a well-diversified portfolio Q that has an actual expected return of 11%. Portfolio Q's factor loadings (i.e., Q's betas on each of the two factors) and the factors, risk premiums are shown in the table below. The risk-free rate is 3%. Factor Q's factor Factor Risk Premium loading (Beta) 1.2 0.6 5.0% -4.0% a) What would be the expected return on the portfolio Q if it were fairly priced? b) Suppose that in addition to Q and the risk-free asset, portfolios for factors A and B are tradable (i.e., you can take long or short positions in them). Construct a "replicating" portfolio P with identical risk to Q by investing in, A, B, and the risk-free asset. What are the weights of P in each of these three assets? What is the expected return of portfolio P

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

I know that there is arbitrage since P = 17.5% but it actual expect is supposed to be 18%. But can i know how do you find the weights of P in each of these 3 asset? This is the question. Part (b)...

Question 1: What is the alpha of Portfolio Z? For questions 2-5 Create a strategy that takes advantage of the mispricing that exists. Create your strategy your strategy so that it goes either long or...

please do 10 11 12 Far Gestoch 12 HINT: Poll 2123 in twee that you want to model with faction in the modellerden wollen pothuthan expected 2016. Por actor Schwed the created Rotation and you can show...

please help the answer already on chegg is wrong For Questions 7 through 12 (Big HINT: Follow slides 21-25 in this week's lecture). Assume that you are using a two-factor APT model, with factors Pand...

Assume that you are using a two-factor APT model, with factors P and Q, to find the fair (model-) expected return on a well-diversified portfolio Z that has an actual expected return of 20%....

Assume that you are using a two-factor APT model, with factors A and B, to find the fair expected return on a well-diversified portfolio Q that has an actual expected return of 18%. Portfolio Q's...

B4. [1+3=4 marks] You are using a two-factor APT model to find the "fair" expected return on a well-diversified portfolio P that promises an "actual" expected return of 18%. The relevant factor...

I need help to all the questions in the document attached. I'm trying to study for my final that is 1 day and these are crucial for me. Investment Management 333-693 Final Examination Seat No:...

B4. [1+3=4 marks] You are using a two-factor APT model to find the "fair" expected return on a well-diversified portfolio P that promises an "actual" expected return of 18%. The relevant factor...

Assume that you are using a two-factor APT model to find the expected return on a well-diversified portfolio Q that promises an expected return of 18%. The relevant factor portfolios, their betas,...

1. Suppose the amount uncollectible on March 31 is changed to $1800 and no cash was received from customer subsequent to the write-off of account receivable. what would the balance of the Allowance...

A cubical box of widths Lx = Ly = Lz = L contains an electron. What multiple of h2l8mL2, where m is the electron mass, is? (a) The energy of the electron's ground state, (b) The energy of its second...

2. Joe and Lauren owe $34,000 on their student loans at an interest rate of 5%. The term is 20 years. Find their monthly payment. 3. Construct the first row of the amortization table for their...

Add "Viggo Mortenslet cast = new Map ( ) ;en " to the cast as the key, with value "Aragorn".