There are three possible states of the world: Ugly, Bad and Good. We know exactly how much return the following three securities (A, B and C) will yield in each of the possible states: State Probability Growth in production Stock A Stock B Stock C Securities A, B and C sell for 50 rupees each Ugly Bad Good 1/3 1/3 1/3 0% 5% 10% 16% 6% -4% 4% 9% 14% 2% 12% 22% (a) Calculate the values of F (unanticipated growth in industrial production) for the only factor in all three states (b) Calculate from the above table, the expected returns of each of the three securities, and their factor sensitivities to the industrial production factor (c) Using only securities A and B, calculate the implied risk-free rate, and the factor premium for the industrial production factor (d) Now, using only securities A and C, calculate the implied risk-free rate, and the factor premium for the industrial production factor (e) Comparing your answers from (c) and (d) above, is there an arbitrage opportunity in this economy? The risk-free rate in a given economy is 5%, and the expected rate of return on the market is 10%. I am buying a firm with a perpetual annual cash flow of Rs. 2,000. If I think the beta of the firm is 0.8, when the beta is in fact 1.6, how much more will I offer for the firm than it is really worth? (10 points) Upload File Sarah owns a portfolio of stocks that have a market value of Rs. 50,000, and an estimated CAPM beta of 0.90. (a) If the market risk premium is 9%, and the risk-free rate is 6%, what is the expected equilibrium return on this portfolio? (b) If Sarah decides to sell one of her holdings that has a market value of Rs. 10,000 and a beta of 0.75, and invest the proceeds in another stock having a beta of 1.3, what is the new equilibrium expected return on her portfolio? (10 points) Upload File Suppose you have the following investment options available: (a) Risk-free asset with a rate of return 8%, and (b) Risky asset earning an expected return 20%, and standard deviation 40%. If you construct a portfolio of the above two instruments with a standard deviation of 30%, what will the expected return of your portfolio be? (5 points)