Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 12, Problem 10QP
a.
Summary Introduction
To determine: To Construct a Portfolio Containing Securities 1 and 2, the Expected Return and
Introduction:
Arbitrage Pricing Theory (APT) is a substitute form of CAPM (
b.
Summary Introduction
To determine: To Construct a Portfolio Containing Securities 3 and 4, the Expected Return and
c.
Summary Introduction
To determine: The Possible Arbitrage Opportunity.
d.
Summary Introduction
To determine: The Effects of Existence of such Arbitrage Opportunities’ and Graphing the Findings.
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Students have asked these similar questions
Assume that security returns are generated by the single-index model,Ri = αi + βiRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data:
Security
βi
E(Ri)
σ(ei)
A
0.7
7
%
20
%
B
0.9
9
6
C
1.1
11
15
a. If σM = 16%, calculate the variance of returns of securities A, B, and C.
b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
Assume that security returns are generated by the single-index model,
Ri a BiRM + ei
where R₁ is the excess return for security /and Ry is the market's excess return. The risk-free rate is 3%. Suppose also that there are
three securities A, B, and C, characterized by the following data:
Security Bi E(Ri} #{@į)
A
1.5
61 298
B
1.7
8
15
C
1.9
10
24
a. If oy 26%, calculate the variance of returns of securities A, B, and C.
Answer is complete but not entirely correct.
Variance
Security A
1,521
Security B
1,609
Security C
2,440
b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively.
What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared
and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
Assume that security returns are generated by the single-index model,
Ri = alphai + BetaiRM + ei
where Ri is the excess return for security i and RM is the market's excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data.
Security
Betai
E(Ri)
sigma(ei)
A
1.4
15%
28%
B
1.6
17%
14%
C
1.8
19%
23%
a. If simaM = 24%, calculate the variance of returns of securities A, B, and C (round to whole number).
Variance
Security A
Security B
Security C
b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C (enter the variance answers as a whole number decimal and the mean as a whole number percentage)?
Mean
Variance
Security A
?%
Security B
?%
Security C
?%
Chapter 12 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 12 - Prob. 1CQCh. 12 - Prob. 2CQCh. 12 - Prob. 3CQCh. 12 - Prob. 4CQCh. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQCh. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ
Ch. 12 - Prob. 1QPCh. 12 - Factor Models Suppose a three-factor model is...Ch. 12 - Prob. 3QPCh. 12 - Multifactor Models Suppose stock returns can be...Ch. 12 - Prob. 5QPCh. 12 - Market Model The following three stocks are...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - APT Assume that the following market model...Ch. 12 - Prob. 10QP
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