There are only two (equally-likely) states of nature in this economy: boom and bust, which are driven by a common macroeconomic factor F. Asset A & B's payoffs are as shown in the table. Apply APT to obtain factor beta and risk premiums (premia) under no-arbitrage condition. B F Boom (50%) Bust (50%) Price (t=0) 140 135 +1 100 80 -1 105 90 [i] If there is asset Q with its factor beta of 0.66, what is the expected rate of return on asset Q (according to the APT)? 1 [ii] Asset Q should be able to be replicated by a portfolio of asset A & B. What are the percentage weight on asset A and asset B in the Asset Q-replicating portfolio?

There are only two (equally-likely) states of nature in this economy: boom and bust, which are driven by a common macroeconomic factor F. Asset A & B's payoffs are as shown in the table. Apply APT to obtain factor beta and risk premiums (premia) under no-arbitrage condition. B F Boom (50%) Bust (50%) Price (t=0) 140 135 +1 100 80 -1 105 90 [i] If there is asset Q with its factor beta of 0.66, what is the expected rate of return on asset Q (according to the APT)? 1 [ii] Asset Q should be able to be replicated by a portfolio of asset A & B. What are the percentage weight on asset A and asset B in the Asset Q-replicating portfolio?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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