Exercise 4Consider the following two factor model for the excess returns of two stocks.1.2F₁ +0.4F₂ + ča0.8F₁ +1.6F₂ + čbřeaze==The expected return on asset A is 16% and on asset B 26%. The risk free rate is 6%.According to ATP framework, the expected excess returns are:E [re]E [r]==1.2F₁ +0.4F₂0.8F₁ + 1.6F2a. If the APT holds in this market, calculate the risk premia corresponding to the twofactors (F₁ = 7₁ − rƒ and F₂ = T2 — rf).b. Find the variances and covariances of the two assets. You know that both factors havea variance of 0.01 and that ca0.01 and b0.04.==c. By means of asset A and B and risk-free rate, construct a portfolio which has a unitexposure to the first factor (3₁p = 1) and no exposure to the second factor (3₂p = 0).What is going to be a fair return on such a portfolio?

a) Risk premia refers to the amount by which the return of a risky asset is expected to outperform…

Exercise 4 Consider the following two factor model for the excess returns of two stocks. 1.2F₁ +0.4F₂ + ča 0.8F₁ + 1.6F₂+ eb ña = ri = The expected return on asset A is 16% and on asset B 26%. The risk free rate is 6%. According to ATP framework, the expected excess returns are: E [re] E [r] = = 1.2F₁ +0.4F2 0.8F₁+1.6F2 a. If the APT holds in this market, calculate the risk premia corresponding to the two factors (F₁ = T₁ - Tƒ and F₂ = T2 - Tƒ). b. Find the variances and covariances of the two assets. You know that both factors have a variance of 0.01 and that ea = 0.01 and b = 0.04. c. By means of asset A and B and risk-free rate, construct a portfolio which has a unit exposure to the first factor (3₁p = 1) and no exposure to the second factor (3₂p = 0). What is going to be a fair return on such a portfolio?

Exercise 4 Consider the following two factor model for the excess returns of two stocks. 1.2F₁ +0.4F₂ + ča 0.8F₁ + 1.6F₂+ eb ña = ri = The expected return on asset A is 16% and on asset B 26%. The risk free rate is 6%. According to ATP framework, the expected excess returns are: E [re] E [r] = = 1.2F₁ +0.4F2 0.8F₁+1.6F2 a. If the APT holds in this market, calculate the risk premia corresponding to the two factors (F₁ = T₁ - Tƒ and F₂ = T2 - Tƒ). b. Find the variances and covariances of the two assets. You know that both factors have a variance of 0.01 and that ea = 0.01 and b = 0.04. c. By means of asset A and B and risk-free rate, construct a portfolio which has a unit exposure to the first factor (3₁p = 1) and no exposure to the second factor (3₂p = 0). What is going to be a fair return on such a portfolio?

Database System Concepts

7th Edition

ISBN:9780078022159

Author:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan

Publisher:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan

Chapter1: Introduction

Section: Chapter Questions

Problem 1PE

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