Question

Suppose there are two independent economic factors,
*M*_{1} and *M*_{2}. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 48%. Portfolios *A*
and *B* are both well diversified.

Portfolio | Beta on M_{1} |
Beta on M_{2} |
Expected Return (%) |

A |
1.6 | 2.3 | 38 |

B |
2.2 | -0.6 | 8 |

What is the expected return–beta relationship in this economy?
**(Do not round intermediate calculations. Round your answers
to 2 decimal places.)**

Answer #1

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 40%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.8
2.2
30
B
2.1
-0.5
8
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected Return - beta relationship...

Suppose there are two independent economic factors, M1 and M2.
The risk-free rate is 5%, and all stocks have independent
firm-specific components with a standard deviation of 52%.
Portfolios A and B are both well diversified. Portfolio Beta on M1
Beta on M2 Expected Return (%) A 1.6 2.5 31 B 2.4 -0.7 12 What is
the expected return–beta relationship in this economy? (Do not
round intermediate calculations. Round your answers to 2 decimal
places.) Expected return–beta relationship E(rP) =...

Suppose there are two independent economic factors,
M1 and
M2. The
risk-free rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 42%. Portfolios A
and B are both well diversified.
Portfolio
Beta on
M1
Beta on
M2
Expected
Return (%)
A
1.5
2.4
32
B
2.3
-0.5
10
What is the expected return–beta relationship in this economy?
(Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Expected return–beta relationship E(rP) = %...

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 50%. Portfolios A
and B are both well diversified.
Portfolio
Beta on
M1
Beta on
M2
Expected
Return (%)
A
1.6
2.5
40
B
2.4
-0.7
10
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship
E(rP) = %...

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 50%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.6
2.5
40
B
2.4
-0.7
10
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship E(rP) =6.00%...

Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 4%, and all stocks have independent firm-specific
components with a standard deviation of 53%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.7
1.9
32
B
1.8
-0.7
13
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship
E(rP) =...

Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 10%, and all stocks have independent firm-specific
components with a standard deviation of 40%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.6
2.0
30
%
B
2.5
–0.20
25
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...

Consider the multifactor APT. There are two independent economic
factors, F1 and F2. The
risk-free rate of return is 6%. The following information is
available about two well-diversified portfolios:
Portfolio
ββ on F1
ββ on F2
Expected Return
A
1.0
2.0
19
%
B
2.0
0.0
12
%
Assuming no arbitrage opportunities exist, the risk premium on
the factor F1 portfolio should be

Consider a one factor economy where the risk free rate is 5%,
and portfolios A and B are well diversified portfolios. Portfolio A
has a beta of 0.6 and an expected return of 8%, while Portfolio B
has a beta of 0.8 and an expected return of 10%. Is there an
arbitrage opportunity in this economy? If yes, how could you
exploit it?

Consider a one factor economy where the risk free rate is 5%,
and Portfolios A and B are well diversified portfolios.
Portfolio A has a Beta of 0.6 and an expected return of 8%
Portfolio B has a Beta of 0.8 and an expected return of 10%
Is there an arbitrage opportunity in this economy? If yes, how
could you exploit it?
Please explain the steps

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