QUESTIONS AND PROBLEMS 1. Assume that the following two-index model describes returns: R=a+b+b212 +e; Assume that the following three portfolios are observed. Portfolio ABC Expected Return 12.0 13.4 12.0 bil b₁₂ 0.5 1 0.2 3 -0.5 3 Find the equation of the plane that must describe equilibrium returns. 111 illustrate the arbitrage opportunities that

QUESTIONS AND PROBLEMS 1. Assume that the following two-index model describes returns: R=a+b+b212 +e; Assume that the following three portfolios are observed. Portfolio ABC Expected Return 12.0 13.4 12.0 bil b₁₂ 0.5 1 0.2 3 -0.5 3 Find the equation of the plane that must describe equilibrium returns. 111 illustrate the arbitrage opportunities that

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider a two-factor Arbitrage Pricing Theory (APT) model, T; = a; + b1,ifı + b2.i f2 + €i, with the following information Asset i Asset 1 0.07 0.50 0.25 Asset 2 0.15 1.10 0.75 Asset 3 0.20 b1,3 Hi b1i b2i 1.0 and the risk-free rate rp is 0.025. (a) Find the value of b13 to preclude arbitrage opportunity. (b) is an Asset 4 with 4 = 0.13, b14 = 0.8, and b2.4 = 0.4. Explain how you would exploit an arbitrage opportunity if there
What is the GBM and how should this be understood
If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) | Slope of the line %
Question No. 1: Explain the following Financial Terminology and then determined the relationship between its. portfolio efficient Beta Coefficient frontier efficient Diversification Diversifiable Risk Systematic Risk
i need the answer quickly
Draw the profit diagram of the portfolio just drawn (and clearly state any assumptions you make). The profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
Suppose you have an investment portfolio with fraction x invested in a market portfolio and (1-x) in a risk- free asset. Increasing fraction x invested in the market portfolio and consequently decreasing (1-x) invested in the risk-free asset shall (select any correct answer, if there are multiple correct answers) Select one or more: O decrease the Sharpe ratio of the resulting portfolio O decrease the expected return of the resulting portfolio increase the Sharpe ratio of the resulting portfolio increase the expected return of the resulting portfolio Dincrease the risk of the resulting portfolio
What is a risk measure? a Alpha b Required return on the market portfolio c Standard deviation of historical returns
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…
Use the following table to answer the questions a-c below. Risky Portfolio Expected return on risky portfolio Standard Risk-free Sharpe-ratio deviation of risky | return portfolio 3 1 8 3 2 10 4 3 3 12 4.9 3 4 14 6 3 a. Calculate the Sharpe ratio for each portfolio b. Identify the optimal portfolio from the above 4
CASE 3 (6 marks): The following graph shows the efficient frontier for the portfolio containing x, y and z securities EFFICIENT FRONTIER 0.00525 D 0.00475 В A 0.00425 W 0,00375 0.00325 0.00275 0.006 0.0065 0.007 0.0075 0.008 0.0085 op 3 а) Which combination of the portfolio is most efficient or the closest to optimal, A, B, C or D and why? Additionally, explain the difference between each of these portfolios. 3 b) If the star represents portfolio E, is it better than B? Explain why or why not. 3 c) If the triangle represents portfolio F, is it better than C? D? Explain why or why not. ERP

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