Question
In: Finance
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% |
Solutions
Expert Solution
No arbitrage expected return for portfolio ABC =Risk Free Rate +
Beta*(Market Return-Risk Free Rate)
=2%+1.8*(8%-2%) =12.8%
No arbitrage expected return for portfolio ABC is 12.8%(Option e is correct
option)
jeff jeffy answered 2 years agoRelated Solutions
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