The US investor now learns that the two-factor arbitrage pricing theory (APT) model describes the US stock market. The risk premium on the first factor is 8% and the risk premium on the second factor is 2%. Asset A has an expected return of 5% and factor betas of 0 and 0, respectively. 2. What is the risk-free interest rate? Write down the expected return relationship in this market.

The US investor now learns that the two-factor arbitrage pricing theory (APT) model describes the US stock market. The risk premium on the first factor is 8% and the risk premium on the second factor is 2%. Asset A has an expected return of 5% and factor betas of 0 and 0, respectively. 2. What is the risk-free interest rate? Write down the expected return relationship in this market.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter15: International Corporate Governance And Control

Section: Chapter Questions

Problem 2IEE

See similar textbooks

Similar questions

Hello Can you explain this
ces Problem 6-14 (Algo) Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Correlation = -1 Rate of return Stock A B Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) Yes No Expected Return 5% 10% % Standard Deviation 45% 55% b. Could the equilibrium rf be greater than rate of return?
Q4
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Payoff Price Security A в State 1 State 2 PA = 2 Pg = 3 4 2 3 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Рayolf Price Security State 1 State 2 PA=2 A 4 2 PB-3 B a. Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure socurities by arbitrage.
Question 5 a) How do financial institutions help individuals to diversify their portfolio risks? Which financial institution is best able to achieve this goal? b) Suppose the real risk-free rate in 2022 was 3.50% and inflation for the year was 3.0 %. If investors had expected the same inflation rate as that actually realised, what was the exact nominal interest rate? c) Please define the risk-adjusted return on capital (RAROC).
Hello can you explain how one should calculate the alpha and beta for a specific asset. There is no number for this, only explanation
Prompt: Optimum portfolio combines investments – Talk about optimizing investments in a portfolio. Global investing needs to be included. Many foreign stock and bond investments provide superior rates of return compared with U.S. securities. They have low correlations with U.S. stock and bond portfolios (Chapter 3). Discuss how the inclusion of foreign securities in a portfolio will help to reduce the overall risk of the portfolio and, in fact, may increase the rate of return to the portfolio.
Question 2 The following is the information for securities of ABC plc and XYZ plc: XYZ plc 26 40 1.25 Particulars Expected return Standard deviation Beta ABC plc 25 42 0.85 The correlation coefficient between the returns of the two securities is 0.70 and standard deviation of the market return is 20%. Required (a) As a new graduate accountant, CPA(T), determine if it is better to invest in securities of ABC plc or XYZ plc (b) If the proportional of investment in ABC plc is 40% and that in XYZ plc is 60% determine the expected rate of return and portfolio standard deviation (c) Determine the risk free rate
about SOFR and LIBOR a SOFR represents the interest rate of the unsecured funds LIBOR is a good proxy of the risk-free rate SOFRS include triparty repo data from the Bank of New York Mellon (BNYM) and the Depository Trust & Clearing Corporation (DTCC). LIBOR now in 2020 is still the most influential interest rate in the international market.
What is the answer for M19?
QUESTION 47 Which of the following is true? An American call on a non-dividend paying stock will be worth more than a European call on that same stock. O A stock is equivalent to a long call, short put and long risk-free bond. The put-call parity rule for American options is stated as equalities. The time value of a call is greatest when the stock price is very high.