Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 20P
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Assume the APT equation for portfolios A and B with the following system of equations:
E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0
E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0
Assume the following:
. The risk free rate is λ0 = Rf = 5
. The expected return on the market portfolio is RM = 10
. Expected returns are consistent with the
. (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ).
Answer the following:
(a) What are λ1 and λ2?
(b) What is the CAPM β associated with the pure portfolio associated with factor 1?
(c) What is the CAPM β associated with the pure portfolio associated with factor 2?
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