2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expectedreturn is given byE[R] = 20 + B₁₁₁₁ + Bizd₂+,...,+BinanAssume 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(R¡)P₁0.18Sensitivity to factor 1: B₁₁Sensitivity to factor 2: Biz0.20.7P₂0.050.10.3b) Assume there is another well diversified security P3 in this economy with factorsensitivities, ẞ3,1 = 0.2, and 3,2 = 0.7. The expected return of this security is E(R3) =0.25. State whether the APT is satisfied. If yes, explain why, if not propose an arbitragestrategy.

The Arbitrage Pricing Theory (APT) is used to determine if the expected returns of securities are…

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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Assume that after one time period, the value of a stock (whose present value is R80) would be either R120 or R60. Suppose that, for any y, at a cost of Cy, one can purchase at a time-0 the option to buy y shares of the stock at time-1 at a price of R90 per share. For what values of C, no-arbitrage will be possible? (Provide necessary details).
Q7. You are given that for a special fully discrete 5-year deferred whole life insurance of 100,000 on (40), the death benefit during the 5-year deferral period is the return of benefit premiums paid without interest. Annual benefit premiums are payable only during the deferral period while the mortality follows the Illustrative Life Table, you are also provided that i = 0.06 and (IA) ₁ — = 0.04042. 1 40:51 Find the annual benefit premium.
The APR for loans can also be approximated (however, not within the 1 4 of 1% accuracy required by Regulation Z†) by using the following formula: APR = 2mI P(n + 1) where m = the number of payment periods per year I = the interest (or finance charge) P = the principal (amount financed) n = the number of periodic payments to be made. Thus, if m = 12, I = $264, P = $1200 and n = 30, APR = 2mI P(n + 1) = 2 × 12 × 264 1200 × 31 = 17%. Use the APR formula to find the APR to one decimal place. (Assume m = 12.) AmountFinanced FinanceCharge Number ofPayments $4000 $332 12 %State the difference between the answer obtained by the formula and the answer obtained using the True Annual Interest Rate (APR) table. (Round your answer to one decimal place.) %
Prove that the accumulation function associated with the force of interest satisfies the principle of consistency.
Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 13 percent while its cost of equity is 17 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield. What will be JB's WACC? (Round your answer to 2 decimal places.
5. An equity investment manager is given the task of beating the S&P 500 index. Hence the risk should be measured in terms of (a) Loss relative to the bond benchmark (b) Loss relative to the initial investment (c) Loss relative to the S&P 500 index (d) Loss relative to the expected portfolio value 6. Consider a portfolio with 80% invested in asset X and 20% invested in asset Y. The volatilities of asset X and Y are 0.2 and 0.3, respectively. The correlation coefficient between the two assets is 50%. What is the portfolio volatility? (a) 19.70% (b) 43.51% (c) 12.99% (d) 18.33% 7. Consider the information from Question 6; however, suppose that the correlation coefficient de- creases significantly. What happens to the portfolio volatility? (a) Stays the same (b) Decreases (c) Increases (d) Cannot determined due to insufficient information
Why would a company issue 100-year bond or hold 100-year debt as both CN and CP do? O Investors might view the ultra-long duration as a way to lock-in to a long-term positive return, even if a small one. O Issuing ultra-long debt may allow companies to 'lock-in' interest rates while they are at low levels. O All of the above may lead a company to consider and issue what's been termed 'century bonds' or 100 year bonds. O Such a lengthy term can instill confidence in the bond market that the company will be around for another century.
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NWP Assessment Player Ul Appl X ples om/was/ui/v2/assessment-player/index.html?launchid=55af9b11-006e-41ba-a782-378cb68e49ba#/question/0 Question 1 of 2 Click here to access the TVM Factor Table Calculator + The cash flow profile for an investment is given below and the interest rate is 8% compounded annually. EOY Net Cash Flow ($) 0 1 2 3 4 5 6 -100 200 Find the present worth of this series using the actual cash flows. $ Round your answer to the nearest dollar. Tolerance is ±4. e Textbook and Media Attempts: 0 of 3 used -/1 Submit Ar
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7.31. A financial institution has entered into a swap where it agreed to receive quarterly payments at a rate of 2% per annum and pay the SOFR three-month reference rate on a notional principal of $100 million. The swap now has a remaining life of 10 months. Assume the risk-free rates with continuous compounding (calculated from SOFR) for 1 month, 4 months, 7 months, and 10 months are 1.4%, 1.6%, 1.7%, and 1.8%, respectively. Assume also that the continuously compounded risk-free rate observed for the last two months is 1.1%. Estimate the value of the swap.
An all-equity firm is considering the projects shown below. The T-bill rate is 6 percent and the market risk premium is 6 percent. Project A B C D Project A Project B Expected Return 10 20 Project C 14 18 Calculate the project-specific benchmarks for each project. (Round your answers to 2 decimal places.) Project D [Select] [Select] [Select] % [Select] Beta 0.6 1.3 1.5 1.7 % % ✓ % ✓%

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