Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.9 B 2.8 rf RP1 RP2 Beta on F2 2.2 -0.22 % % % Expected Return What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP₁ and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (p1 x RP1) + (p2 × RP2) 33% 28%

Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.9 B 2.8 rf RP1 RP2 Beta on F2 2.2 -0.22 % % % Expected Return What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP₁ and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (p1 x RP1) + (p2 × RP2) 33% 28%

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 46%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 2.1 3.0 rf RP1 RP2 Beta on F2 2.4 -0.24 % % % Expected Return What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP₁ and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (Bp1 × RP₁) + (Bp2 × RP2) 35% 30%
Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 45%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.5 B 2.2 rf RP1 RP2 Beta on F2 2.0 -0.2 % % % Expected Return What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP₁ and RP2 to complete the equation below. (Do not round intermediate calculations. Round your answers to 2 decimal places.) E(rp) = rf + (BP1 x RP1) + (BP2 x RP2) 31% 27%
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%. The following are well-diversified portfolios: Portfolio Beta on F1 Beta on F2 Expected Return A 1.5 2.0 31% B 2.2 -0.2 27% [i]. What is the risk premium for F1?
If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Expected Portfolio Return. 18% 18% A Market (8) Expected Standard Portfolio Return Deviation 219 168 A Market C) Expected Portfolio Return 218 168 A Market D) Portfolio A Market Beta 1.1 1.0 Expected Return 27.14 18% 118 198 Beta 1.1 1.0 Beta 1.7 1.0
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 Expected Return 1.9 -0.19 31% 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp) rf+(BP1 x RP1) + (BP2 x RP2) " % RP % RP2 %
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm- specific components with a standard deviation of 53%. Portfolios A and B are both well-diversified with the following properties: Portfolio A B Beta on F1 1.5 2.5 Beta on F2 Expected Return 1.9 -0.19 31% 28% Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. = E(rp) rf+(PP1 x RP1) + (BP2 x RP2) % RP1 % RP2 %
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.9 2.2 33 % B 2.8 –0.22 28 % What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.)E(rP) = rf + (βP1 × RP1) + (βP2 × RP2)
Assume that there are two factors that price assets. Interest rate rf = 4%. You have thefollowing information about two well-diversified arbitrage-free risky portfolios. (a) Calculate the risk premium of the two risk factors. (b) There is a third well-diversified portfolio with β1 = 1.1 and β2 = 0.9. What is thisportfolio’s arbitrage free expected return? (c) Suppose the forecasted return of the portfolio in the question (b) is 13.5%. Show how youcould construct an arbitrage portfolio.
Suppose we have the following information: Securit Amount Invested Expected Return Beta Stock A RM1 ,OOO 8% 0.80 Stock B RM2,OOO 12% 0.95 Stock C RM3,OOO 15% 1.10 Stock D RM4,OOO 18% a) Compute the expected return on this portfolio. b) Calculate the beta of the portfolio. c) Does this portfolio have more or less systematic risk than an average asset? Explain.
Suppose that there are two independent economic factors, F, and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 46%. Portfolios A and 8 are both well-diversified with the following properties: Expected Portfolio Beta on F1 Beta on F2 Es ReturnA 2.1 2.4 35%B 3.0 -0.24 30% What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) Blrp) = r¢ + (Ber * RP1) + (Bp2 * RP2) Please see attached image for more details.