Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25% 1). Consider an asset that currently sells for $30 and has βi = 0.6. Suppose the asset pays a dividend of $1.5 and the expected price at the end of the period is $30.5. Calcuate the α of this asset. Is it over- or underpriced? 2). Consider an asset with βi = 1.25 and expected return of 11%. Can an investor use this asset to make a risk-free profit through arbitrage? Explain your answer
Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25% 1). Consider an asset that currently sells for $30 and has βi = 0.6. Suppose the asset pays a dividend of $1.5 and the expected price at the end of the period is $30.5. Calcuate the α of this asset. Is it over- or underpriced? 2). Consider an asset with βi = 1.25 and expected return of 11%. Can an investor use this asset to make a risk-free profit through arbitrage? Explain your answer
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 2P: APT
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...
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Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25%
1). Consider an asset that currently sells for $30 and has βi = 0.6. Suppose the asset pays a dividend of $1.5 and the expected price at the end of the period is $30.5. Calcuate the α of this asset. Is it over- or underpriced?
2). Consider an asset with βi = 1.25 and expected return of 11%. Can an investor use this asset to make a risk-free profit through arbitrage? Explain your answer
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