Question
Please calculate work in excel and attach as excel doc to see work. I need this within the next 2 hours maximum! Thanks! CAPM and
Please calculate work in excel and attach as excel doc to see work. I need this within the next 2 hours maximum! Thanks!
CAPM and APT:
1. The expected rate of return on the market portfolio is 9.75% and the riskfree rate of return is 1.50%. The standard deviation of the market portfolio is 19.75%. What is the representative investors average degree of risk aversion?
2. Stock A has a beta of 1.50 and a standard deviation of return of 35%. Stock B has a beta of 4.25 and a standard deviation of return of 85%. Assume that you form a portfolio that is 60% invested in Stock A and 40% invested in Stock B. Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?
3. Using the information in questions 1 and 2, what is your best estimate of the correlation between stocks A and B?
4. Your forecasting model projects an expected return of 13.25% for Stock A and an expected return of 41.50% for Stock B. Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return?
5. A different analyst uses a twofactor APT model to evaluate expected returns and risk. The risk premiums on the factor 1 and factor 2 portfolios are 4.25% and 2.95%, respectively, while the riskfree rate of return remains at 0.75%. According to this APT analyst, your portfolio formed in question 2 has a beta on factor 1 of 3.70 and a beta on factor 2 of 2.60. According to APT, what is the expected return on your portfolio if no arbitrage opportunities exist?
6. Now assume that your forecasting model of question 4 accurately projects the expected return of Stocks A and B and therefore your portfolio, and that the APT model of question 5 describes the fair rate of return for your portfolio. Do any arbitrage opportunities exist? If yes, would you invest long or short in your portfolio constructed in question 2?
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