1. The three factors chosen are Market, Size, and Book to Market (B/M). Your analyst used the data on Berkshire Hathaway stock returns, performed linear regression, and obtained the three betas. Suppose the estimates of the betas, or factor loadings, are:

BRKB,Market=0.65; BRKB,SIZE=0.30; BRKB,B/M=0.37

The average (annualized) premia for the three factors are:

ErS&P500-rf= 5%; Ersmall-Erbig= 2.25% ; ErValue-ErGrowth= 0.7%

Risk-free rate: 3%. Calculate expected return on Berkshire Hathaway stock.

2. In lectures we discussed different asset pricing models in detail. Please list and briefly discuss several conceptual differences between the Arbitrage Pricing Theory (APT) and Fama-French 3 Factor Model.

3. When we studied standard CAPM, we learned that CAPM requires (and assumes) that investors are risk averse. That is, they require compensation for taking risk. Please discuss what does APT (Arbitrage Pricing Theory) say about this (about risk aversion)?

4. Pfizer stock is selling for $40.34 per share. A CALL option with strike (exercise price) of $40 and maturity of 1 year is selling for $5.10 (this is call option price). Risk-free rate for discounting over 1 year (APR) is 3%. What is the price of a PUT option on Pfizer stock, with strike price of $40, and maturity of 1 year?

5. The price at t = 0 of 1 share of Pfizer is $40.00. The annual discount rate (APR) is 4%. One year from now, one share of Pfizer will be $35 per share in the DOWN state and $45 per share in the UP state. What is the price today (at t = 0), of a PUT option with strike price of $40 and maturity (expiration) of 1 year? Please show your work.

6. What is the price of a CALL option with the same strike price ($40) and the same maturity (1 year)? Please show your work.