2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[Ri] = 20 + ßi,1λ₁ + ßi,2λ₂+, ..., +ßi,nλn a) Assume that risk-free rate in this economy is 0.02. Consider a two-factor model, n = 2 and two well diversified portfolios P₁ and P2 with the following features: P₁ Expected returns: E(R₁) 0.18 P2 0.05 Sensitivity to factor 1: Bi,1 0.2 0.1 Sensitivity to factor 2: ẞi,2 0.7 0.3 Find the risk premiums for each factor.

2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[Ri] = 20 + ßi,1λ₁ + ßi,2λ₂+, ..., +ßi,nλn a) Assume that risk-free rate in this economy is 0.02. Consider a two-factor model, n = 2 and two well diversified portfolios P₁ and P2 with the following features: P₁ Expected returns: E(R₁) 0.18 P2 0.05 Sensitivity to factor 1: Bi,1 0.2 0.1 Sensitivity to factor 2: ẞi,2 0.7 0.3 Find the risk premiums for each factor.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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