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= b) Assume there is another well diversified security P3 in this economy with factor sensitivities, 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 arbitrage strategy

= b) Assume there is another well diversified security P3 in this economy with factor sensitivities, 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 arbitrage strategy

Algebra & Trigonometry with Analytic Geometry
Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter1: Fundamental Concepts Of Algebra
Section1.2: Exponents And Radicals
Problem 31E
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In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[R].

= b) Assume there is another well diversified security P3 in this economy with factor sensitivities, ẞ3,1 0.2, and 3,2 = 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 arbitrage strategy.
Transcribed Image Text:= b) Assume there is another well diversified security P3 in this economy with factor sensitivities, ẞ3,1 0.2, and 3,2 = 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 arbitrage strategy.
E[R] = 20 + Bi,1λ₁ + Bizλ₂+, ..., +ẞinλn
Transcribed Image Text:E[R] = 20 + Bi,1λ₁ + Bizλ₂+, ..., +ẞinλn
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