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Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1) 1 +
Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1) 1 + (0.8) 12 E(RB) = (0.6) 1 + (0.5) 12 E(RC) = (1.6) 1 + (1.1) 12 a. If 11 = 2% and 12 3%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $20 and will not pay dividend in the next year. Do not round intermediate calculations. Round your answers to the nearest cent. Expected price for Stock A: $ Expected price for Stock B: $ Expected price for Stock C: $ b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $25.81, $20.77, and $21.62. Assume that you can use the proceeds from any necessary short sale. Determine the riskless, arbitrage investment to take advantage of these mispriced securities. In order to create a riskless arbitrage investment, an investor would -Select- va riskless arbitrage investment. What is the profit from your investment? Round your answer to the nearest cent. $ b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $25.81, $20.77, and $21.62. Assume that you can use the proceeds from any necessary short sale. Determine the riskless, arbitrage investment to take advantage of these mispriced securities. In order to create a riskless arbitrage investment, an investor woul V -Select- Da riskless arbitrage investment. short 1 share of B and 1 share of C, and buy 2 shares of A. What is the profit from your investment? Round your answer to the short 1 share of B and 1 share of A, and buy 2 shares of C. short 1 share of C and 1 share of A, and buy 2 shares of B. $ short 2 shares of B and buy 1 share of A and 1 share of C. short 2 shares of A and buy 1 share of B and 1 share of C
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