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Question 2 ( Applications ) 2 0 points Suppose that you have just started your first job as a junior investment manager at a hedge
Question Applications points
Suppose that you have just started your first job as a junior investment manager at a
hedge fund. You have the data on the risk levels and the corresponding expected return
appreciation or yield of the following five securities eg stocks, or bonds:
Table : RiskReturn Characteristics of Five Securities
a points Use the OLS formulas provided in class, or from the textbook, to regress
the expected return of a security on the corresponding risk index That is
estimate the following regression model:
Report your estimates hat and hat Show your work.
b points Use your estimates hat and hat to find the expected return to a riskfree security,
that is a security with risk index In other words, find hat
c points Suppose a broker offers you to invest in a security with expected return of
and a risk index of Based on your regression estimates and the model in
does that represent a good deal? Explain your reasoning.
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