a. According to the APT, what is the risk premium on each of the three stocks? b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? c. Suppose you buy $80 of X and $60 of Y and sell $40 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium
The following question illustrates the APT. Imagine that there are only two pervasive
Investments b1 b2
X 1.75 0.25
Y 1.00 2.00
Z 2.00 1.00
Assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills offer zero risk premium.
a. According to the APT, what is the risk premium on each of the three stocks?
b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium?
c. Suppose you buy $80 of X and $60 of Y and sell $40 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium?
d. Finally, suppose you buy $160 of X and $20 of Y and sell $80 of Z. What is your portfolio’s sensitivity now to each of the two factors? And what is the expected risk premium?
e. Suggest two possible ways that you could construct a fund that has a sensitivity of .5 to factor 1 only. (Hint: One portfolio contains an investment in Treasury bills.) Now compare the risk premiums on each of these two investments.
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