Q2: CAPM and APT:1. The expected rate of return on the market portfolio is 8.50% and the riskâfree rate of return is 2.50%. The standard deviation of the market portfolio is 24%. What is the representative investorâs average degree of risk aversion?2. Stock A has a beta of 1.45 and a standard deviation of return of 32%. Stock B has a beta of 2.55 and a standard deviation of return of 46%. Assume that you form a portfolio that is 60% invested in Stock A and 40% invested in Stock B. Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?3. Using the information in questions 1 and 2, what is your best estimate of the correlation between stocks A and B?4. Your forecasting model projects an expected return of 11.75% for Stock A and an expected return of 20.50% for Stock B. Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return?5. A different analyst uses a twoâfactor APT model to evaluate expected returns and risk. The risk premiums on the factor 1 and factor 2 portfolios are 4.50% and 2.25%, respectively, while the riskâfree rate of return remains at 2.50%. According to this APT analyst, your portfolio formed in question 2 has a beta on factor 1 of 1.30 and a beta on factor 2 of 2.15. According to APT, what is the expected return on your portfolio if no arbitrage opportunities exist?6. Now assume that your forecasting model of question 4 accurately projects the expected return of Stocks A and B and therefore your portfolio, and that the APT model of question 5 describes the fair rate of return for your portfolio. Do any arbitrage opportunities exist? If yes, would you invest long or short in your portfolio constructed in question 2?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more