Consider the following data for a one-factor economy. All portfolios are assumed to be well diversified. Portfolio.                        A.                   F Expected return         12%                6% Beta.                            1.2               0.0 Suppose that another portfolio, portfolio E, is well diversified with a beta of 0.6 and expected return of 8%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy? (Note: show what the percentage profit from arbitrage will be)

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 Expected Return 1.9 -0.19 31% 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. = E(rp) rf+(PP1 x RP1) + (BP2 x RP2) % RP1 % RP2 %

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Consider the following single factor specification: R₁ = a¡ + ßi, Rµ + €i. Where R; is the return on security i, RM is the return on index M (a broad market index) and e, is a zero- mean white noise random variable not correlated with anything. Assume that the single factor specification above correctly describes the return generating processes of all securities. Furthermore, you have the following descriptive statistics for returns of well-diversified Portfolios X, Y, and index M. Portfolio X Portfolio Y Index M Risk-Free Expected return 14% 17% ?? ?? B₁ 1.2 1.6 1 0 a. Assume that the corresponding single factor APT correctly prices Portfolios X and Y. In other words, the expected returns of Portfolios X and Y shown above - 14% and 17% respectively - are equal to their APT-predicted expected returns. Calculate the expected return of Index M and risk-free rate. b. Another well-diversified portfolio Z has a beta, ßz, of 0.8 while its expected return is 10%. Form a portfolio consisting…

Suppose there are two independent economic factors, M₁ and M2. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 58%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 A 1.7- 2.4 2.3 -0.8 Expected Return (%) 37 10 B Required: What is the expected return-beta relationship in this economy? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Expected return-beta relationship E(rp) = % + BP1+ BP2

Calculate the optimal risky portfolio for the following cases when short-sales are allowed. Compute its expected return and the standard deviation of its returns. 1. Two risky assets: Rp = 3, R' = [6, 9], and 4 5 5 20 2. Three risky assets: Rp = 4, R' = [5,9, 8], and [10 0 0 E=0 40 0 0 20 3. Three risky assets: Rp = 5, R' = [12, 9, 8], and 40 10 -5] E= 10 20 0 5 0 30 4. Five risky assets: Rp = 2, R' = [5, 3, 18, 9, 2], and %3D 2 16 0. -12 5 -12 20 16 10 7 14 27 14 9. -13 8. 7 27 13

Calculate the required rate of return for an asset that has a beta of 1.01, given a risk-free rate of %3.4 and a market return of %9.1 . b.  If investors have become more risk-averse due to recent geopolitical events, and the market return rises to %11.6, what is the required rate of return for the same asset? a. The required rate of return for the asset is enter your response here%. (Round to two decimal places.) Part 2 b.  If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 11.6%, the required rate of return for the same asset is enter your response here%. (Round to two decimal places.)

QUESTION Assume that the expected rates of return and the beta coefficients of the alternatives supplied by an independent analyst are as follows:   Security                   Estimated rate of returns               Beta Nescom 5% 1.5 Market 4 1 Pk_Steel 3.5 0.75 T_Bills 3 0 Nawab 1 -0.6   What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear to be related to each alternative’s market risk? Is it possible to choose among the alternatives on the basis of the information developed thus far?

Manipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.48 when the risk-free rate and market return are 8% and 13%, respectively. b. Find the risk-free rate for a firm with a required return of 14.684% and a beta of 1.47 when the market return is 12%. c. Find the market return for an asset with a required return of 12.040% and a beta of 0.95 when the risk-free rate is 5%. d. Find the beta for an asset with a required return of 13.312% when the risk-free rate and market return are 10% and 12.3%, respectively. C a. The required return for an asset with a beta of 1.48 when the risk-free rate and market return are 8% and 13%, respectively, is %. (Round to two decimal places.)

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified.  Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9   Required: What is the expected return–beta relationship in this economy?