2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expectedreturn is given byE[R] = 20 +ẞi,₁₁ + Bizd₂+, ..., +ßi,nana) Assume that risk-free rate in this economy is 0.02. Consider a two-factor model, n = 2and two well diversified portfolios P₁ and P2 with the following features:Expected returns: E(R₁)Sensitivity to factor 1: ẞi,1P₁0.18P₂0.050.20.10.70.3Sensitivity to factor 2: BizFind the risk premiums for each factor.

Risk premium for factor 1 (λ₁) = -2.70Risk premium for factor 2 (λ₂) = 1Explanation:λ0 = 0.02Using…

Answered: 2. In a market in which the Arbitrage…

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

Section: Chapter Questions

Problem 1RQ

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Example 2: Given the following information about ZED Ltd., show the effect of the dividend policy on the market price of its shares, using the Walter's model: = 12% Equity capitalisation rate (K.) Earnings per share (E) Assumed return on investments (r) are as follows: 1) r= 15%
Consider a cash flow of payments C₁, C₂, ..., Cn at the end of years t₁, t2, ..., tn. Suppose the nominal interest rate is r = 0.04 and that interest is compounded monthly. Tick all those statements that are correct. O a. The convexity is the same as the duration squared in this case. 300 O b. The effective duration is equal to 301 times the duration in this case. The effective duration is equal to 25 times the duration in this case. 26 Od. The duration and the effective duration are the same for this example. O e. If all the above cash payments are the same then the effective duration is equal to the duration. O c.
Prove that the accumulation function associated with the force of interest satisfies the principle of consistency.
4. Gursoy Furnitures sells office chairs ordered from its flagship store. It costs $100 to place an order, and the lead time is two weeks. Demand during lead time is N(40, 1.96). Gursoy Furnitures estimates that each stockout causes a loss of $50 in future goodwill. It pays $60 for each chair and sells it for $100. The annual holding a chair inventory is 30% of its purchase cost. a) Assuming that all demand is backlogged, what are the reorder point and the safety stock level? b) To meet 99% service objective, what should be the safety stock level for Type 1 Service? For Type 2 Service?
Based on the information in the following table, use the Naïve Approach to forecast the demand for periods 2-12 PERIOD MONTH Demand Forecast Jan 228 2. Feb 197 Mar 202 Apr 182 May 157 6. Jun 148 Jul 195 Aug 63 Sep 194 10 Oct 278 11 Nov 185 12 Dec 179 3.
Which of the following statements concerning the payback period, is not true? a. The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment. b. The payback period ignores cash flows after the payback point has been reached. c. The payback period is simple to calculate and understand. d. It takes account of the time value of money
The company consulted a roofing coating contractor who presented the company with two options. The first option is a coating that will cost P20,000 which would extend the life of the roofing for 3 years from date of application, and the second option will cost P30,000 and which would extend the life of the roofing for 5 years from the date of application. At what rate of return are the two investments equal?
Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the value of a six-month call and a put option with a strike price of $0.6800 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.5 percent. Assume the annualized volatility of the Swiss franc is 14.2 percent. Use the European option-pricing models to value the call and put option. Option Value Call cents Put cents
Although there is no empirical evidence to strongly support this hypothesis, some financial journalists have claimed that British managers are short-sighted and overly risk averse, preferr ing to take on relatively safe projects that pay off quickly instead of taking on longerterm projects with less certain pay-offs. Assume the journalists are correct.a Explain why managers who use a single discount rate for valuing projects are likely to have a systematic bias against longer-term projects if the systematic risk of the cash flows of many long-term investment projects declines over time.b Discuss how the presence of strategic investment options affects the decisions to adopt long-term over short-term investments. Can you help with the understanding of question a and b
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