Random returns for two well–diversified portfolios

Assignment Help Financial Management

Reference no: EM13928034

Random returns for two well–diversified portfolios at time t are given by:

rAt= 0:27 + 2F1t+ 0:8F2t

rBt= 0:161 +F1t+ 1:1F2t;

Where F1and F2 are unexpected parts of factor 1 and 2 returns, respectively. (One can think that factor one is GDP and factor two is inflation). The risk free rate is 1:0%.

a. Construct factor portfolio for factor 1 by combining portfolios A, B, and T-bills. What are the weights of these portfolios in factor portfolio 1? What is the expected return of factor portfolio 1?

b. Solve question for factor portfolio 2

c. Assume that the market does not allow arbitrage strategies and so the two–factor APT holds. Find the expected returns on portfolio C which betas with respect to factors 1 and 2 are 0.5 and 1.2, respectively

Reference no: EM13928034

Questions Cloud

What is their break-even level of operating income : Home Depot, Inc. (HD) had 1.70 billion shares of common stock outstanding in 2008, wheras Lowes Companies, Inc. (LOW) had 1.46 billion shares outstanding. Assuming Home Depot's 2008 interest expense is $696 million, Lowes' interest expense is $239 mi..

What is standard deviation rounded to nearest whole number : You are given the following probability distribution of returns for stock J: A probability of .2 that the return will be 12%; a probability of .35 that the return will be 18%; a probability of .3 that the return will be -10%; and a probability of .15..

What is annualized holding period return : Jack purchased 100 shares of Green Forest Inc. stock at a price of $157.65 three months ago. He sold all stocks today for $158.57. During this period the stock paid dividends of $5.67 per share. What is Jack's annualized holding period return (annual..

Calculate the expected return of portfolio : Mary holds a portfolio with the following securities: Calculate the expected return of portfolio. Round the answer to two decimal places in percentage form.

Random returns for two well–diversified portfolios : Random returns for two well–diversified portfolios at time t are given by: Construct factor portfolio for factor 1 by combining portfolios A, B, and T-bills. What are the weights of these portfolios in factor portfolio 1? What is the expected return ..

In divisional income statements prepared : In divisional income statements prepared for Wilborne Construction Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll checks, and the Purchasing Department costs are charged back on the basi..

What are the possible reasons for the trend : What does the calculation of each ratio represent? How does year one compare with year two, and what trend can be seen when you compare the two years? Is the trend from year one to year two positive or negative? What are the possible reasons for the ..

What does the calculation of each ratio represent : What does the calculation of each ratio represent? How does year one compare with year two, and what trend can be seen when you compare the two years? Is the trend from year one to year two positive or negative? What are the possible reasons for the ..

Determine the new price of the bonds : The yield to maturity for 15-year bonds is as follows for four different bond rating categories. The bonds of Falter Corporation were rated as Aa1 and issued at par a few weeks ago. The bonds have just received a new rating of Aa3. Determine the new ..

User Account

All Pages