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There are only two (equally-likely) states of nature in this economy: boom and A B Factor bust, which are driven by a common macroeconomic factor
There are only two (equally-likely) states of nature in this economy: boom and A B Factor bust, which are driven by a common macroeconomic factor F. Boom (50%) 140 135 +1 Asset A & Bs payoffs are as shown in the table. Apply APT to obtain factor beta and risk premiums (premia) under no-arbitrage condition. Bust (50%) 100 -1 Price (t=0) 105 90 [i] If there is asset Q with its factor beta of 0.66, what is the expected rate of return on asset Q (according to the APT)? 80 [ii] Asset Q should be able to be replicated by a portfolio of asset A & B in this APT world. What are the percentage weight on asset A and asset B in the Asset Q-replicating portfolio
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