Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns....
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Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy. Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy. Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy. Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy. Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy. Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that E[₁] = E[F₂] = E[F3] The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: TA = 0.05 + F₁ + EA TB = 0.02 — F₁ + F₂ + EB - rc = 0.085 – 0.5 · Ẽ₁ + Ẽ₂ + F3 + ẵc where risks EA, EB, EC are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? b) Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3? c) Suppose there is an asset with loadings of 1 on each of the factors. The asset has an expected return of 10%. If there arbitrage? If so, construct the arbitrage strategy.
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a Ass ume the 3 factor Arbit rage Pricing Theory applies What are the risk prem ia for holding factors 1 2 3 ANS WER The risk prem ia for holding fact... View the full answer
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