2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[R] = 20 + B₁₁₁₁ + Bizd₂+,...,+Binan 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: Expected returns: E(R¡) P₁ 0.18 Sensitivity to factor 1: B₁₁ Sensitivity to factor 2: Biz 0.2 0.7 P₂ 0.05 0.1 0.3 b) Assume there is another well diversified security P3 in this economy with factor sensitivities, 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 arbitrage strategy.
2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[R] = 20 + B₁₁₁₁ + Bizd₂+,...,+Binan 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: Expected returns: E(R¡) P₁ 0.18 Sensitivity to factor 1: B₁₁ Sensitivity to factor 2: Biz 0.2 0.7 P₂ 0.05 0.1 0.3 b) Assume there is another well diversified security P3 in this economy with factor sensitivities, 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 arbitrage strategy.
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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Question
![2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected
return is given by
E[R] = 20 + B₁₁₁₁ + Bizd₂+,...,+Binan
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:
Expected returns: E(R¡)
P₁
0.18
Sensitivity to factor 1: B₁₁
Sensitivity to factor 2: Biz
0.2
0.7
P₂
0.05
0.1
0.3
b) Assume there is another well diversified security P3 in this economy with factor
sensitivities, 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 arbitrage
strategy.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8d1b97ca-a014-4a9d-850a-b61b08d119c0%2Fd9e02d6e-2561-44c0-b6f7-d9f3820eb27b%2F7hphle_processed.png&w=3840&q=75)
Transcribed Image Text:2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected
return is given by
E[R] = 20 + B₁₁₁₁ + Bizd₂+,...,+Binan
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:
Expected returns: E(R¡)
P₁
0.18
Sensitivity to factor 1: B₁₁
Sensitivity to factor 2: Biz
0.2
0.7
P₂
0.05
0.1
0.3
b) Assume there is another well diversified security P3 in this economy with factor
sensitivities, 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 arbitrage
strategy.
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