Question
In: Finance
Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 8.0 Interest rate −.6...
Consider the following simplified APT model:
| Factor | Expected Risk Premium (%) |
| Market | 8.0 |
| Interest rate | −.6 |
| Yield spread | 5.1 |
| Factor Risk Exposures | |||
| Market | Interest Rate | Yield Spread | |
| Stock | (b1) | (b2) | (b3) |
| P | 1.6 | –1.1 | –.4 |
| P2 | 1.6 | 0 | .7 |
| P3 | .3 | .7 | 1.0 |
Consider a portfolio with equal investments in stocks P, P2, and P3. Assume rf = 5%.
a. What are the factor risk exposures for the portfolio? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places.)
| Factor Risk Exposures | |
| Market (b1) | |
| Interest rate (b2) | |
| Yield spread (b3) | |
b. What is the portfolio’s expected return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Expected return %
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 6.3 Interest rate −.5...
Consider the following simplified APT model:
Factor
Expected Risk
Premium (%)
Market
6.3
Interest rate
−.5
Yield spread
4.9
Factor Risk Exposures
Market
Interest Rate
Yield Spread
Stock
(b1)
(b2)
(b3)
P
1.1
−1.9
−.3
P2
1.3
0
.4
P3
.3
.6
.9
Calculate the expected return for each of the stocks shown in
the table above. Assume rf = 4.8%. (Do
not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places.)
Expected return P...
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%)...
Consider a three-factor APT model. The factors and associated
risk premiums are: Factor Risk Premium (%) Change in gross national
product (GNP) +5.7 Change in energy prices 0.3 Change in long-term
interest rates +2.7 Calculate expected rates of return on the
following stocks. The risk-free interest rate is 5.5%. A stock
whose return is uncorrelated with all three factors. (Enter your
answer as a percent rounded to 1 decimal place.) A stock with
average exposure to each factor (i.e., with...
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%)...
Consider a three-factor APT model. The factors and associated
risk premiums are:
Factor
Risk Premium (%)
Change in GNP
+5.6
Change in energy prices
–1.6
Change in long-term interest rates
+2.6
Calculate expected rates of return on the following stocks. The
risk-free interest rate is 5.6%.
a. A stock whose return is uncorrelated with
all three factors. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal
place.)
Expected rate of return
%
b. A...
Consider a two factor model of expected returns where the risk free rate is 6% and the expected risk premiums on the factor portfolios are 3% and 7%.
Consider a two factor model of expected returns where the risk free rate is 6% and the expected risk premiums on the factor portfolios are 3% and 7%. If the factor portfolios are “ideal” and tradable, determine if an arbitrage opportunity exists for the portfolio given below and specify how can it be exploited.portfolioBf1Bf2Expected returnA1.40.80.41
The risk-free interest rate is 4.0%. The market risk premium or MRP is 6%. The market...
The risk-free interest rate is 4.0%. The market risk premium or
MRP is 6%. The market index has a standard deviation of 20%.
Habanero common stock has a standard deviation of 40% and a
correlation coefficient of 0.40 with the market portfolio.
Calculate the equity Beta and the required return for Habanero’s
stock.
Consider an APT world with one systematic risk: MARKET risk. Expected return for the market portfolio...
Consider an APT world with one systematic risk: MARKET risk.
Expected return for the market portfolio is 8% and risk-free rate
is 2%. A stock analyst estimates the following characteristics for
the Portfolio ABC. Assume that the analyst estimates are
correct.
Portfolio
E(R)
Market BETA
ABC
11.0%
1.8
What is the NO-ARBITRAGE (i.e. in equilibrium) expected return for
portfolio ABC?
10.0%
10.5%
11.0%
12.0%
12.8%
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following multifactor (APT) model of security
returns for a particular stock.
Factor
Factor Beta
Factor Risk Premium
Inflation
1.1
8
%
Industrial production
0.6
9
Oil prices
0.3
7
a. If T-bills currently offer a 7% yield, find the
expected rate of return on this stock if the market views the stock
as fairly priced. (Do not round intermediate calculations.
Round your answer to 1 decimal place.)
b. Suppose that the market expects the values for
the three...
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following
multifactor (APT) model of security returns for a particular
stock.
Factor
Factor
Beta
Factor Risk
Premium
Inflation
0.8
6%
Industrial
production
0.4
7
Oil prices
0.1
3
a. If
T-bills currently offer a 3% yield, find the expected rate of
return on this stock if the market views the stock as fairly
priced. (Do not round intermediate calculations. Round your
answer to 1 decimal place.)
Expected rate of
return %
?
b.
Suppose that the...
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following multifactor (APT) model of security
returns for a particular stock.
Factor
Factor Beta
Factor Risk Premium
Inflation
1.0
10%
Industrial production
0.4
12%
Oil prices
0.2
8%
a. If T-bills currently offer a 5% yield, find
the expected rate of return on this stock if the market views the
stock as fairly priced. (Do not round intermediate
calculations. Round your answer to 1 decimal place.)
Expected rate of return = ?%
b. Suppose that the market expects...
Assume that the risk-free rate is 6% and the market risk premium is 3%.
EXPECTED AND REQUIRED RATES OF RETURN
Assume that the risk-free rate is 6% and the market risk premium is 3%.
What is the required return for the overall stock market? Round your answer to two decimal places. %
What is the required rate of return on a stock with a beta of 0.8? Round your answer to two decimal places.
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