Question
In: Finance
Suppose a market governed by two factors, F1 and F2. A well-diversified portfolio A with expected...
Suppose a market governed by two factors, F1 and F2. A well-diversified portfolio A with expected return 28% has betas 1.4 and 1.8 on F1 and F2 respectively. And another well-diversified portfolio B with expected return 25% has betas 2.3 and -0.18 on F1 and F2 respectively. If the risk-free rate is 8%, what should the expected return of a well-diversified portfolio C with beta 1.5 and -1 on F1 and F2 respectively?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
"There are two independent factors in the economy, F1 and F2, and the betas for Portfolio...
"There are two independent factors in the economy, F1 and F2,
and the betas for Portfolio X on these factors are 1 and 2
respectively. For Portfolio Y, the betas on the two factors are 2
and 1 respectively. The expected returns of X and Y are 6.5% and 7%
respectively. If the risk-free rate is 3%, what is the expected
return of Portfolio Z that has beta of 1 on F1 and beta of 1 on
F2?"
Well-diversified portfolio A has a beta of 1.0 and an expected return of 12%. Well-diversified portfolio...
Well-diversified portfolio A has a beta of 1.0 and an expected
return of 12%. Well-diversified portfolio B has a beta of 0.75 and
an expected return of 9%. The risk-free rate is 4%. a. Assuming
that portfolio A is correctly priced (has ?? = 0), what should the
expected return on portfolio B be in equilibrium? b. Explain the
arbitrage opportunity that exists and explain how an investor can
take advantage of it. Give specific details about what to buy...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 7%,...
Suppose that there are two independent economic factors, F1 and
F2. The risk-free rate is 7%, and all stocks have independent
firm-specific components with a standard deviation of 47%.
Portfolios A and B are both well-diversified with the following
properties: Portfolio Beta on F1 Beta on F2 Expected Return A 2.2
2.5 25 % B 2.8 –0.25 20 % What is the expected return-beta
relationship in this economy?
Calculate the risk-free rate, rf, and the factor risk premiums,
RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 9%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 9%, and all stocks have independent firm-specific
components with a standard deviation of 49%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
2.4
2.6
27
%
B
3.0
–0.26
22
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 36%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.2
1.6
26
%
B
2.1
–0.16
23
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 36%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.2
1.6
26
%
B
2.1
–0.16
23
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 46%. Portfolios A
and Bare both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
2.1
2.4
35%
B
3.0
–0.24
30%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and
RP2, to complete...
Problem 10-4 Suppose that there are two independent economic factors, F1 and F2. The risk-free rate...
Problem 10-4
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 35%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.1
1.5
25
%
B
2.0
–0.15
22
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums,...
uppose that there are two independent economic factors, F1 and F2. The risk-free rate is 7%,...
uppose that there are two independent economic factors, F1 and
F2. The risk-free rate is 7%, and all stocks have independent
firm-specific components with a standard deviation of 37%.
Portfolios A and B are both well-diversified with the following
properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.3
1.7 27 % B 2.2 –0.17 24 % What is the expected return-beta
relationship in this economy? Calculate the risk-free rate, rf, and
the factor risk premiums, RP1 and...
Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a...
Assume that you hold a well-diversified portfolio that has an
expected return of 11.0% and a beta of 1.20. You are in the process
of buying 1,000 shares of Alpha Corp at $10 a share and adding it
to your portfolio. Alpha has an expected return of 21.5% and a beta
of 1.70. The total value of your current portfolio is $90,000. What
will the expected return and beta on the portfolio be after the
purchase of the Alpha stock?...
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