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06 (40 points): Consider two well-diversit is, their alphas are equal to zero. Morcov idiosyncratic components of onsider two well-diversified portfolios A and B that
06 (40 points): Consider two well-diversit is, their alphas are equal to zero. Morcov idiosyncratic components of onsider two well-diversified portfolios A and B that conform to a two-factor model, that are equal to zero. Moreover, the two shocks to factors, Fu and F2. have zero means and borrow at the risk-free rate All returns are expressed in percentage porn mponents of the returns on A and B are neeligible. Also, investors may both lend and eturns are exnessed in percentage points as follows: PA 14 +1.6 F +0.7 F2 + Bus 11 +0.8 Fu + 1.1 F2, +ERS - 2. o.1 (20 points): Use A, B, and the risk-free asset to construct a factor portfolio P. (insensitive to F, unit sensitivity to F). Q6.2 (10 points) Compute the expected rate of return on factor portfolio P. Q6.3 (10 points) Compute 21, the risk premium per unit of factor-1 risk. 06 (40 points): Consider two well-diversit is, their alphas are equal to zero. Morcov idiosyncratic components of onsider two well-diversified portfolios A and B that conform to a two-factor model, that are equal to zero. Moreover, the two shocks to factors, Fu and F2. have zero means and borrow at the risk-free rate All returns are expressed in percentage porn mponents of the returns on A and B are neeligible. Also, investors may both lend and eturns are exnessed in percentage points as follows: PA 14 +1.6 F +0.7 F2 + Bus 11 +0.8 Fu + 1.1 F2, +ERS - 2. o.1 (20 points): Use A, B, and the risk-free asset to construct a factor portfolio P. (insensitive to F, unit sensitivity to F). Q6.2 (10 points) Compute the expected rate of return on factor portfolio P. Q6.3 (10 points) Compute 21, the risk premium per unit of factor-1 risk
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