Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 6 /10/ a) Company ABX stock has a return of 12%. The portion of the return that is not explained by a two-factor macroeconomic

image text in transcribed
Question 6 /10/ a) Company ABX stock has a return of 12%. The portion of the return that is not explained by a two-factor macroeconomic factor model is 5%. Use the data below to calculate company ABX's expected return. (4) Table 1: Macroeconomic Factor Model for ABX Company Stock Variable Actual Value Expected Value Stock's Factor (%) (%) Sensitivity Change in interest 1.0 2.0 1 rate Growth in GDP 4.0 2.0 3.0 b) The table below provides data on four hypothetical portfolios. All investors are assumed to agree upon the expected returns and factor sensitivity of the portfolios. Assume that the following one-factor model describes the expected return for portfolios; E(Rp) = 0.05 +0.05Bp,1 Portfolio Expected Return Factor Sensitivity A 0.0750 0.50 B 0.1500 2.00 C 0.0700 0.40 D 0.0800 0.45 i) Define arbitrage. (1) ii) Assuming the one-factor model is correct and based on the data provided for Portfolios A, B, C and D, determine if an arbitrage opportunity exists. (3) iii) In question (ii) above, if an arbitrage opportunity exists, explain how it may be exploited. (2) Question 6 /10/ a) Company ABX stock has a return of 12%. The portion of the return that is not explained by a two-factor macroeconomic factor model is 5%. Use the data below to calculate company ABX's expected return. (4) Table 1: Macroeconomic Factor Model for ABX Company Stock Variable Actual Value Expected Value Stock's Factor (%) (%) Sensitivity Change in interest 1.0 2.0 1 rate Growth in GDP 4.0 2.0 3.0 b) The table below provides data on four hypothetical portfolios. All investors are assumed to agree upon the expected returns and factor sensitivity of the portfolios. Assume that the following one-factor model describes the expected return for portfolios; E(Rp) = 0.05 +0.05Bp,1 Portfolio Expected Return Factor Sensitivity A 0.0750 0.50 B 0.1500 2.00 C 0.0700 0.40 D 0.0800 0.45 i) Define arbitrage. (1) ii) Assuming the one-factor model is correct and based on the data provided for Portfolios A, B, C and D, determine if an arbitrage opportunity exists. (3) iii) In question (ii) above, if an arbitrage opportunity exists, explain how it may be exploited. (2)

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

Fundamentals Of Futures And Options Markets

Authors: John C. Hull

5th Edition

0131445650, 9780131445659

More Books

Students also viewed these Finance questions

Question

How IBM software helps the Canadian tyre company? Detail analysis

Answered: 1 week ago

Question

=+7. What is the big message you want them to know? (THINK SLOGAN.)

Answered: 1 week ago