APT There are two stock markets, each driven by the same common force F with an expected
Question:
APT There are two stock markets, each driven by the same common force F with an expected value of zero and standard deviation of 10 percent. There are many securities in each market; thus you can invest in as many stocks as you wish. Due to restrictions, however, you can invest in only one of the two markets. The expected return on every security in both markets is 10 percent.
The returns for each security i in the first market are generated by the relationship R1i 0.10 1.5F 1i where 1i is the term that measures the surprises in the returns of stock i in market l. These surprises are normally distributed; their mean is zero. The returns for security j in the second market are generated by relationship R2j 0.10 0.5F 2j where 2j is the term that measures the surprises in the returns of stock j in market LO.1
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