Question
In: Finance
Suppose stock returns can be explained by the following three-factor model: Ri = RF + β1F1...
Suppose stock returns can be explained by the following
three-factor model:
Ri = RF + β1F1
+ β2F2 − β3F3
Assume there is no firm-specific risk. The information for each
stock is presented here:
| β1 | β2 | β3 | |
| Stock A | 1.18 | .40 | .06 |
| Stock B | .80 | 1.35 | −.25 |
| Stock C | .71 | −.17 | 1.24 |
The risk premiums for the factors are 6.6 percent, 4.9 percent, and
5.6 percent, respectively. You create a portfolio with 25 percent
invested in Stock A, 25 percent invested in Stock
B, and the remainder in Stock C.
What is the expression for the return on your portfolio?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g.,
32.16.)
| Factor Beta | |
| Factor F1 | _______ |
| Factor F2 | _________ |
| Factor F3 | ________- |
If the risk-free rate is 2.8 percent, what is the expected return
on your portfolio? (Do not round intermediate calculations
and enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.)
Expected return ____________ %
Solutions
jeff jeffy answered 1 year agoRelated Solutions
5. Suppose that asset returns satisfy the single factor model: ri = E(ri ) + βiF...
5. Suppose that asset returns satisfy the single factor model:
ri = E(ri ) + βiF + ei , and let P and Q represent two well
diversified portfolios. Suppose that βp < βq and E(rp) >
E(rq).
a. Show there exists an arbitrage opportunity provided that
investors can borrow at a rate of interest that is below E(rq)
b. Does there exist an arbitrage opportunity if the borrowing
rate is greater than E(rq )?
Factor Models Suppose a factor model is appropriate to describe the returns on a stock. The...
Factor Models Suppose a factor model is appropriate to describe
the returns on a stock. The current expected return on the stock is
10.5 percent. Information about those factors is presented in the
following:
Factor
B
Expected Value
Actual Value
Growth in GNP
1.67
2.1%
2.6%
Inflation
-1.09
4.3
4.8
a. What is the systematic risk of the stock return?
b. The firm announced that its market share had unexpectedly
increased from 11 percent to 15 percent. Investors know from...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0008021
$14,161
$14,142
Inflation
−.85
3.4%
3.2%
Interest rates
−.42
6.2%
6.0%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0007421
$14,086
$14,062
Inflation
−.95
2.9%
2.7%
Interest rates
−.37
5.2%
5.0%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0007781
$14,131
$14,110
Inflation
−.98
3.2%
3.0%
Interest rates
−.40
5.8%
5.6%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded to 2...
The capital asset pricing model (CAPM) can be written as E(Ri) = Rf+ βi[E(Rm) − Rf]...
The capital asset pricing model (CAPM) can be written as E(Ri) =
Rf+ βi[E(Rm) − Rf] using the standard notation. The first step in
using the CAPM is to estimate the stock’s beta using the market
model. The market model can be written as Rit= αi+ βiRmt+ uit where
Rit is the excess return for security i at time t, Rmtis the excess
return on a proxy for the market portfolio at time t, and utis an
iid random disturbance...
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...
Consider the two empirical models for excess returns (Ri-Rf) of stocks A and B. The risk...
Consider the two empirical models for excess returns (Ri-Rf) of
stocks A and B. The risk free rate (Rf) over the period was 6%, and
the market’s average return (Rm) was 14%. Stock A Stock B Estimated
market models Ri-Rf= 1% + 1.2(Rm – Rf) Ri-Rf = 2% + 0.8(Rm – Rf)
Standard deviation of excess returns 21.6% 24.9% Find the following
for each stock: i) Alpha ii) Sharpe ratio iii) Treynor ratio
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