Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Given the single factor model r = E(r) + bF + for which 340 stocks rely to generate their returns where F is a factor

Given the single factor model r = E(r) + bF + for which 340 stocks rely to generate their returns where F is a factor and b is the factor loading and is idiosyncratic error. Stock A which is one of the 340 stocks has an expected return of 7% , a factor loading of b = 0.03, a factor F with a mean of zero following a variance of 1 and a standard deviation of idiosyncratic error of 37%. These characteristics are the same for all the 340 stocks. Risk free rate is 3%. The portfolio we hold has equal weight on each stock and places nothing on the risk-free asset.

Question:What is the standard deviation of return on this portfolio and what is the covariance of the stock return with the return of the portfolio ?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments Analysis and Management

Authors: Charles P. Jones

12th edition

978-1118475904, 1118475909, 1118363299, 978-1118363294

More Books

Students also viewed these Finance questions

Question

Identify the primary purpose of selection activities. AppendixLO1

Answered: 1 week ago