Question

If the Market value for an asset does not equal the price that CAPM (or maybe...

If the Market value for an asset does not equal the price that CAPM (or maybe the APT) suggests that it should be, does that suggest that there would be an unexploited arbitrage opportunity

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

No, it does not suggest that there would be an unexploited arbitrage opportunity.

We know that arbitrage opportunities exist as a result of market inefficiencies, which allow investors to exploit price differences. In case of CAPM only beta factor i.e. market volatility is taken into consideration. Although in case of Arbitrage pricing theory has more factors including non company factors making it more complex. Both APT and CAPM are not comprehensive measure of the market price, it depends on the investor's discretion also.

So, the market value may not be equal to the market price determined by these two models resulting no opportunity for arbitrage.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You find an asset that does not lie on the security market line (SML). Is there...
You find an asset that does not lie on the security market line (SML). Is there an arbitrage opportunity? Briefly explain, with reference to Arbitrage Pricing Theory.
According to CAPM, there is linear relationship between the assets but APT assumes linear relationship between...
According to CAPM, there is linear relationship between the assets but APT assumes linear relationship between the risk factors. APT- Arbitrage Pricing Theory is a method of estimating the price of the assets. This theory is based on macroeconomics, market and security specific factors. Formula- E(rj) = rf + bj1 RP1 +bj2 RP2 + bj3 RP3....... Where E(rj) = Asset's expected rate of return, rf = risk free rate, bj = the senstivity of the asset's return to the factor,...
Assume the CAPM holds. The risk-free rate is 5% and the market portfolio expected return is...
Assume the CAPM holds. The risk-free rate is 5% and the market portfolio expected return is 15% with a standard deviation of 20%. An asset has an expected return of 16% and a beta of 0.8. a) Is this asset return consistent with the CAPM? If not, what expected return is consistent with the CAPM? b) How could an arbitrage profit be made if this asset is observed? c) Would such a situation be expected to exist in the longer...
In the theoretical Capital Asset Pricing Model (CAPM), the slope of the Securities Market Line (SML)...
In the theoretical Capital Asset Pricing Model (CAPM), the slope of the Securities Market Line (SML) is determined by the value of beta. True or False?
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
The current spot price of silver is $32/oz, the interest rate on three‐month loans or deposits...
The current spot price of silver is $32/oz, the interest rate on three‐month loans or deposits is 0.75%, and a three‐month futures contract on silver is currently traded at $32.50/oz. The size of the contract is 100 oz. a. Assuming that there is no storage or transaction cost, determine the theoretical price of the three‐month silver futures b. Determine whether an arbitrage opportunity is present in the market. If so, suggest a trading strategy that would take advantage of such...
When analyzing the purchase of a capital asset, the Net Present Value was equal to $500,...
When analyzing the purchase of a capital asset, the Net Present Value was equal to $500, but the Internal Rate of Return and the Payback Period were both below preferred levels. How should you proceed? Decline the opportunity, because in business, nothing is worth doing for only $500. Accept the opportunity because the NPV is above zero. Decline the opportunity since two of the three analysis conclude you should decline. Do not act on this. Wait for some time to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT