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Assume that a manager of a mutual fund knows that the fund is currently well diversified and that it has a CAPM beta equal to
Assume that a manager of a mutual fund knows that the fund is currently well diversified and that it has a CAPM beta equal to . The risk-free rate is R, and the expected market return is ER . The manager knows that there are three factors that price assets according to the arbitrage pricing theory (APT), namely, 11, 5, and fy . Use values for, =1, R, =0.08, E(R.)=0.14, E(.)=0.13,E(72)=0.19, E(F3)=0.18, bpx =-0.5 and P2 (1) If the factors have expected values of E(), E(F) and E(F), write down the APT equation. (ii) If the manager's portfolio currently has a sensitivity to the first factor of bp, and has a sensitivity to the second factor of bp2, what is its sensitivity to the third factor, bp,3? (iii) If the manager rebalances the portfolio to keep the same expected return but reduces its exposure to f, and f, to zero, what will its sensitivity to the first factor become? Assume that a manager of a mutual fund knows that the fund is currently well diversified and that it has a CAPM beta equal to . The risk-free rate is R, and the expected market return is ER . The manager knows that there are three factors that price assets according to the arbitrage pricing theory (APT), namely, 11, 5, and fy . Use values for, =1, R, =0.08, E(R.)=0.14, E(.)=0.13,E(72)=0.19, E(F3)=0.18, bpx =-0.5 and P2 (1) If the factors have expected values of E(), E(F) and E(F), write down the APT equation. (ii) If the manager's portfolio currently has a sensitivity to the first factor of bp, and has a sensitivity to the second factor of bp2, what is its sensitivity to the third factor, bp,3? (iii) If the manager rebalances the portfolio to keep the same expected return but reduces its exposure to f, and f, to zero, what will its sensitivity to the first factor become
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