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You live in a world where asset prices are determined by three factors: The price of oil, the price of lithium, and a CAPM-style market factor. Below are the returns on several useful assets:

Asset

Return

Riskless government debt

1.2%

Well-diversified portfolio of firms exposed to lithium prices

9.1%

Well-diversified portfolio of firms unaffected bylithium prices

8.8%

Well-diversified portfolio of firms exposed to oil prices

13.8%

Well-diversified portfolio of firms unaffected by oil prices

14.9%

Broad based index fund

12.4%


a. Using the asset returns above, what are the factor values for each of the three factors?

b. What would be the expected return on an asset with a market beta of 0.9, a lithium beta of 1.4, and an oil beta of -.3?

c. Under the APT, what mechanism is responsible for enforcing the security market line?

Expert Answer:

Answer rating: 100% (QA)

a To calculate the factor values for each of the three factors the market factor lithium factor and View the full answer


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Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

ISBN: 978-1337614689

9th edition

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

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Question Details
Chapter # 12- Valuation: Cash-Flow-Based Approaches
Section: INTEGRATIVE CASE
Problem: 2
Posted Date: September 06, 2023 01:21:02
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