2. In a market in which the Arbitrage Pricing Theory (APT) model holds, the expectedreturn is given byE[R;] = 20 + ßi,1λ₁ + ßi,2λ2+, ..., +ßi,nλna) Assume that risk-free rate in this economy is 0.02. Consider a two-factor model, n = 2and two well diversified portfolios P₁ and P2 with the following features:P1P2Expected returns: E(R₁)0.180.05Sensitivity to factor 1: ẞi,10.20.1Sensitivity to factor 2: ẞi,20.70.3Find the risk premiums for each factor. =b) Assume there is another well diversified security P3 in this economy with factorsensitivities, ẞ3,1 = 0.2, and ẞ3,2 = 0.7. The expected return of this security is E(R3) =0.25. State whether the APT is satisfied. If yes, explain why, if not propose an arbitragestrategy.

a) To find the risk premiums for each factor, we'll use the APT model: \[E[R_i] = \lambda_0 +…

Answered: 2. In a market in which the Arbitrage…

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

Section: Chapter Questions

Problem 1RQ

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The accompanying data represent the annual rates of return of two companies' stock for the past 12 years. Complete parts (a) through (k). O A. OB. 0.50- 0.50- 0.00- 0.00- -0.50- -0.50- -0.3 RR of Company 2 0.0 0.3 -0.3 0.0 0.3 RR of Company 1 OC. 0.30- 0.50- 0.00- 0.00- -0.30- -0.50- o.0 0'5 0.0 0.3 -0.5 RR of Company 2 0.5 -0.3 RR of Company 1 (b) Determine the correlation coefficient between rate of return of Company 1 and Company 2. The correlation coefficient is 0.966. (Round to three decimal places as needed.) (c) Based on the scatter diagram and correlation coefficient, is there a linear relation between rate of return of Company 1 and Company 2? Yes No (d) Find the least-squares regression line treating the rate of return of Company 1 as the explanatory variable. y=x+O (Round to four decimal places as needed.) RR of Company 1 RR of Company 1 RR of Company 2 RR of Company 2
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In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[R].

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