CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12, Problem 9QP
APT Assume that the following market model adequately describes the return generating behavior of risky assets:
Here:
Ru = The return on the ith asset at Time t.
RMt = The return on a portfolio containing all risky assets in some proportion at Tuner.
RMr and ∊u are statistically independent.
Short selling (i.e., negative positions) is allowed in the market. You are given the following information:
| Asset | β1 | E(R1) | Var(∊1) |
| A | .7 | 8.41% | 12.06 |
| B | 1.2 | 13.95 | .0100 |
| c | 1.5 | .0144 | .0225 |
The variance of the market is .0121, and there are no transaction costs.
- a. Calculate the standard deviation of
returns for each asset. - b. Calculate the variance of return of three portfolios containing an infinite number of asset types A, B, or C, respectively.
- c. Assume the risk-free rate is 3.3 percent and the expected return on the market is 10.6 percent. Which asset will not be held by rational investors?
- d. What equilibrium state will emerge such that no arbitrage opportunities exist? Why?
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Chapter 12 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
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Ch. 12 - Prob. 1QPCh. 12 - Factor Models Suppose a three-factor model is...Ch. 12 - Prob. 3QPCh. 12 - Multifactor Models Suppose stock returns can be...Ch. 12 - Prob. 5QPCh. 12 - Market Model The following three stocks are...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - APT Assume that the following market model...Ch. 12 - Prob. 10QP
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- The Arbitrage Pricing Theorem states that:a)If arbitrage opportunities do not exist then the returns of all assets are driven by a set of common factors.b)Arbitrage portfolios are impossible.c)The expected return of any arbitrage portfolio is zero.d)The common constant factor is the risk-free assetarrow_forwardWhich of the following statements describing the elements of intrinsic valuation is most accurate? a. A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best. b. The risk-free rate is the lowest rate that an investor can earn from short-term investments.c. When the present value of the cashflows is discounted with the appropriate rate end this present value is positive, then the asset providing these cashflows have a value to the investor. d.Cashflows may include depreciatipon expenses and amortization costs.arrow_forwardAssume that the following two assets are priced according to the zero-beta security market line: asset 1 has expected return of 6% and beta 0.5; asset 2 has expected return 14% and beta 2. (i) A third asset is mispriced by the market: it has beta 1.5 and expected return of 8%. Explain how you can set up a portfolio to exploit the arbitrage opportunity. What is the expected return of such portfolio? [33%] (ii) A fourth asset is mispriced by the market: it has beta 1.2 and expected return of 18%. Explain how you can set up a portfolio to exploit the arbitrage opportunity. What is the expected return of such portfolio? [33%] (iii) What should be the expected return for an asset with beta 0.8?arrow_forward
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