Question
In: Finance
Problem 10-8 Assume that security returns are generated by the single-index model, Ri = αi +...
Problem 10-8
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 | 1.5 | 6 | % | 29 | % |
| B | 1.7 | 8 | 15 | ||
| C | 1.9 | 10 | 24 | ||
a. If σM = 26%, 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.)
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 2 years agoRelated Solutions
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 4%. Suppose also that there are three
securities A, B, and C, characterized by
the following data:
Security
βi
E(Ri)
σ(ei)
A
1.3
14%
27%
B
1.5
16
13
C
1.7
18
22
a. If σM = 22%, calculate
the variance of returns...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 2%. Suppose also that there are three securities A, B, and C,
characterized by the following data: Security βi E(Ri) σ(ei) A 0.7
7 % 20 % B 0.9 9 6 C 1.1 11 15
a. If σM = 16%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 2%. Suppose also that there are three
securities A, B, and C, characterized by
the following data:
Security
βi
E(Ri)
σ(ei)
A
1.2
12
%
25
%
B
1.3
13
11
C
1.4
14
20
a. If σM = 23%, calculate
the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 2%. Suppose also that there are three
securities A, B, and C, characterized by
the following data:
Security
βi
E(Ri)
σ(ei)
A
1.3
13
%
22
%
B
1.5
15
13
C
1.7
17
16
a. If σM = 20%, calculate
the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 4%. Suppose also that there are three
securities A, B, and C, characterized by
the following data:
Security
βi
E(Ri)
σ(ei)
A
1.3
14%
27
%
B
1.5
16%
13
%
C
1.7
18%
22
%
a. If σM = 22%, calculate
the...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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
1.0
10
%
23
%
B
1.3
13
9
C
1.6
16
18
a. If σM = 20%, calculate
the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
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 2%. Suppose also that there are three securities A, B, and C,
characterized by the following data: Security βi E(Ri) σ(ei) A 0.8
10 % 25 % B 1.0 12 10 C 1.2 14 20
a. If σM = 20%, calculate the variance...
***Please show the math! Thank you! Assume that security returns are generated by the single-index model,...
***Please show the math! Thank you!
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
1.0
10
%
23
%
B
1.3
13
9
C
1.6
16
18
a. If...
Ri = αi + βiRM + ei where Ri is the excess return for security i...
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
0.5
13
%
26
%
B
0.9
17
12
C
1.3
21
21
a. If σM = 25%, calculate
the variance of returns of securities A, B, and
C.
b. Now...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Both Bond Bill and Bond Ted have 5.8 percent coupons, make semiannual payments, and are priced...
- Consider the following nonfunctional requirements and determine which of them can be verified and which cannot....
- Consider a public good with only two consumers, A and B. The demand function by Customer...
- Assess the FASB website. Examine 2014, 2015 and 2016 ASU's. Identify and list the PCC ASU's.
- you will read and discuss Chapter 2 of Questions of Character: Illuminating the Heart of Leadership...
- Question 3 Why does a global sales forces cause special compensation problems? Suggest some alternative solutions....
- Which of the following statements regarding the predictive value of historical returns is true? A. Historical...
ADVERTISEMENT