There are only two (equally-likely) states of nature in this economy: boom and bust, which are driven by a common macroeconomic factor F. Asset A & B's payoffs are as shown in the table. Apply APT to obtain factor beta and risk premiums (premia) under no-arbitrage condition. B F Boom (50%) Bust (50%) Price (t=0) 140 135 +1 100 80 -1 105 90 [i] If there is asset Q with its factor beta of 0.66, what is the expected rate of return on asset Q (according to the APT)? 1 [ii] Asset Q should be able to be replicated by a portfolio of asset A & B. What are the percentage weight on asset A and asset B in the Asset Q-replicating portfolio?

There are only two (equally-likely) states of nature in this economy: boom and bust, which are driven by a common macroeconomic factor F. Asset A & B's payoffs are as shown in the table. Apply APT to obtain factor beta and risk premiums (premia) under no-arbitrage condition. B F Boom (50%) Bust (50%) Price (t=0) 140 135 +1 100 80 -1 105 90 [i] If there is asset Q with its factor beta of 0.66, what is the expected rate of return on asset Q (according to the APT)? 1 [ii] Asset Q should be able to be replicated by a portfolio of asset A & B. What are the percentage weight on asset A and asset B in the Asset Q-replicating portfolio?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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