To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β 2 Coefficient. Introduction: Arbitrage Pricing Theory (APT) is a substitute form of CAPM ( Capital Asset Pricing Model ). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

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Answer 1

Question

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

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Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.4 14 % 23 % B 1.6 16 14 C 1.8 18 17 a. If σM = 22%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)

1. Suppose there are three complex securities and three different states as follows: Security So S₁(1) S₁ (2) S₁ (3) 1.2 3 0 0 1.8 4 2 0 1.2 2 1 1 2 10 4 A B C D (a) Find the arbitrage-free price of asset D. (b) What is the risk-free return compatible with these asset prices?

Assume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei where Ri is the excess return for security i and RM is the market's excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data. Security Betai E(Ri) sigma(ei) A 1.4 15% 28% B 1.6 17% 14% C 1.8 19% 23% a. If simaM = 24%, calculate the variance of returns of securities A, B, and C (round to whole number). Variance Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C (enter the variance answers as a whole number decimal and the mean as a whole number percentage)? Mean Variance Security A ?% Security B ?% Security C ?%

Answer 2

Question

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

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Answer 3

Question

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

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Answer 4

Question

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

Expert Solution & Answer

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Answer 5

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

Answer 6

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

Answer 7

Chapter 12, Problem 10QAP

a.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and β2 Coefficient.

Introduction:

Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model). This hypothesis, as CAPM gives financial specialists or investors assessed required rate of return for the risky securities. APT reflects on risk premium premise indicated set of elements notwithstanding the correlation of the cost of the asset with expected surplus return on the portfolio.

Answer 8

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

Answer 9

b.

Summary Introduction

To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

Answer 10

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

Answer 11

c.

Summary Introduction

To determine: The Possible Arbitrage Opportunity.

Answer 12

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

Answer 13

d.

Summary Introduction

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

Answer 14

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Answer 15

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Answer 16

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Answer 17

Ch. 12 - Prob. 1CQ Ch. 12 - Prob. 2CQ Ch. 12 - Prob. 3CQ Ch. 12 - Prob. 4CQ Ch. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQ Ch. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ

Solution Summary: The author explains that Arbitrage Pricing Theory (APT) is a substitute form of CAPM (Capital Asset Pricing Model).

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To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and β2 Coefficient.

To determine: The Possible Arbitrage Opportunity.

To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.

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Chapter 12 Solutions