2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expectedreturn is given byE[R] = 20 +ẞi,₁₁ + Bizd₂+, ..., +ßi,nana) Assume that risk-free rate in this economy is 0.02. Consider a two-factor model, n = 2and two well diversified portfolios P₁ and P2 with the following features:Expected returns: E(R₁)Sensitivity to factor 1: ẞi,1P₁0.18P₂0.050.20.10.70.3Sensitivity to factor 2: BizFind the risk premiums for each factor.

Risk premium for factor 1 (λ₁) = -2.70Risk premium for factor 2 (λ₂) = 1Explanation:λ0 = 0.02Using…

Answered: 2. In a market in which the Arbitrage…

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

Section: Chapter Questions

Problem 1RQ

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If the expected return on the market is 8% and the risk free rate is 4% and the expected return is 12%, what is the market risk premium ?
The Capital Asset Price Model (CAPM) is a financial model that attempts to predict the rate of return on a financial instrument, such as a common stock, in such a way that it is linearly related to the rate of return on the overal market. Specifically, RStockAiBo + BR Markets + e You are to study the relationship between the two variables and estimate the above model: R StockAi-rate of return on Stock A for month i, i = 1,2,---, 59. RMarket-market rate of return for month i, i=1,2,..., 59. B₁ represent's the stocks 'beta' value, or its systematic risk. It measure's the stocks volatility related to the market volatility. Bo represents the risk-free interest rate. The data in the .csv file contains the data on the rate of return of a large energy company which will be referred to as Acme Oil and Gas and the corresponding rate of return on the Toronto Composite Index (TSE) for 59 randomly selected months. Therefore Re, represents the monthly rate of return for a common share of Acme Oil…
The delta of an underlying asset (such as a stock) is 1.00 and therefore it can be used to hedge delta from an options position. True or False
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In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[R].
Find the expected value of the yearly rate of return of an investment that, for an initial cost of 100, is equally likely to yield either 120 or 100 after 2 years.
A standard "money demand" function used by macroeconomists has the form In(m) = Bo + B, In(GDP) + B2R, Where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent per year. Supposed that B, = 2.15 and B, = -0.06. %3D What is the expected change in m if GDP increases by 3%? The value of m is expected to V by approximately%. (Round your response to the nearest integer) What is the expected change in m if the interest rate increases from 1% to 9%? The value of m is expected to ▼ by approximately %. (Round your response to the nearest integer)
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The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 14.7% (i.e. an average gain of 14.7%) with a standard deviation of 33%. A return of 0% means the value of the portfolio doesn’t change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money. (a) What percent of years does this portfolio lose money, i.e. have a return less than 0%? (b) What is the cutoff for the highest 15% of annual returns with this portfolio?
The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 14.7% (i.e. an average gain of 14.7%) with a standard deviation of 33%. A return of 0% means the value of the portfolio doesn't change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money. A) What percentage of years does this portfolio lose money, i.e. have a return less than 0%? B) What is the cutoff for the highest 15% of annual returns with this portfolio?
The Capital Asset Pricing Model (CAPM) is a financial model that assumes returns on a portfolio are normally distributed. Suppose a portfolio has an average annual return of 14.7% (i.e. an average gain of 14.7%) with a standard deviation of 33%. A return of 0% means the value of the portfolio doesn’t change, a negative return means that the portfolio loses money, and a positive return means that the portfolio gains money. What percent of years does this portfolio lose money, i.e. have a return less than 0%? What is the cutoff for the highest 15% of annual returns with this portfolio?

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