Need help. 2. This problem demonstrates one approach to show R* + R;Re* = Rf.(a) Write any return R as R* + (R – R*) and use the fact that 1 – Re* is orthogonalto excess returns recall that R°* represents the expectation operator on the space ofexcess returns-to show that1(1 – Rº*)E[R*]X =is an SDF.(b) When there is a risk-free asset, X defined above, being spanned by a constant and anexcess return, is in the span of the returns and hence must equal X*. Use this fact todemonstrate R" + R;Rº* = R;. (Hint: E (R*)° = E[R*] may be useful.)

"SDF" can refer to various concepts depending on the context. One common usage is the "Stochastic…

2. This problem demonstrates one approach to show R* +R{Re* = Rƒ. (a) Write any return R as R* + (R-R) and use the fact that 1- Re* is orthogonal to excess returns-recall that Re* represents the expectation operator on the space of excess returns to show that 1 X (1 - R*) E[R*] is an SDF. (b) When there is a risk-free asset, X defined above, being spanned by a constant and an excess return, is in the span of the returns and hence must equal X*. Use this fact to demonstrate R* + R+Re* = Rƒ. (Hint: E [(R¢*)²] = E[Re*] may be useful.)

2. This problem demonstrates one approach to show R* +R{Re* = Rƒ. (a) Write any return R as R* + (R-R) and use the fact that 1- Re* is orthogonal to excess returns-recall that Re* represents the expectation operator on the space of excess returns to show that 1 X (1 - R) E[R] is an SDF. (b) When there is a risk-free asset, X defined above, being spanned by a constant and an excess return, is in the span of the returns and hence must equal X. Use this fact to demonstrate R + R+Re* = Rƒ. (Hint: E [(R¢)²] = E[Re] may be useful.)

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter5: Probability: An Introduction To Modeling Uncertainty

Section: Chapter Questions

Problem 10P

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