Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4) POINTS 20: Assume that a two-factor APT model describes the re- turns of well-diversified portfolios. You have concluded that the factor risk-premia for factors
4) POINTS 20: Assume that a two-factor APT model describes the re- turns of well-diversified portfolios. You have concluded that the factor risk-premia for factors 1 and 2 are respectively -5% per year and +6% per year. You have also identified three well diversified portfolios: A, B and C, with factor loadings given by bA1 = -1.0 64,2 = 2.0 bb,1 = 1.0 bB.2= -1.0 bci = 2.0 bc2 = 2.0 The risk-free rate (for borrowing and lending) is 5% per year. = a) What are the values of the risk premia to, 11 and 12 in this economy? b) Find the expected returns of portfolios A, B and C. c) Find the weights of the factor mimicking portfolio for factor 1 (as- suming you construct it using A, B and C). What is the expected return on this portfolio? What are the weights of the factor mim- icking portfolio for factor 2? 4) POINTS 20: Assume that a two-factor APT model describes the re- turns of well-diversified portfolios. You have concluded that the factor risk-premia for factors 1 and 2 are respectively -5% per year and +6% per year. You have also identified three well diversified portfolios: A, B and C, with factor loadings given by bA1 = -1.0 64,2 = 2.0 bb,1 = 1.0 bB.2= -1.0 bci = 2.0 bc2 = 2.0 The risk-free rate (for borrowing and lending) is 5% per year. = a) What are the values of the risk premia to, 11 and 12 in this economy? b) Find the expected returns of portfolios A, B and C. c) Find the weights of the factor mimicking portfolio for factor 1 (as- suming you construct it using A, B and C). What is the expected return on this portfolio? What are the weights of the factor mim- icking portfolio for factor 2
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started