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Unformatted text preview: E[R x ] = .05 + 1*E[f 1 ]+ 1*E[f 3 ] = .1 E[R y ] = .05 + 1*E[f 2 ] = .15 E[R z ] = .05 + 1*E[f 3 ] = .15 So E[f 3 ] = .1 E[f 2 ] = .1 E[f 1 ] = .15 And E[R A ] = a + b 1A E[f 1 ]+ b 2A E[f 2 ]+ b 3A E[f 3 ] = .05+(1*.15)+(2*.1)+(1*.1) = .1 Alternativly we could solve this by picking weights w1+w2+w3 = 1 to form a portfolio with betas (1,2,1) b1 = 1 = w1*(1) + w2* (0) + w3*(0) b2 = 2 = w1*(0) + w2*(1) + w3*(0) b3 = 1 = w1*(1) + w2*(0) + w3*(1) Solve for w1,w2,w3 to get w1 = 1, w2 = 2, w3 = 2 Thus a portfolio with w1 = 1, w2 = 2, w3 = 2 will have betas = (1,2,1) NoArbitrage implies the expected return of this portfolio must be the same as the expected return of stock A. E[R A ] = w1*(.1) + w2* (.15) + w3*(.1) = 1*(.1) + (2)*(.15) + (2)*(.15) = .1 #2: What is the riskpremia for factor 3? From #1 we know that E[f 3 ] = .1...
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This test prep was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.
 Winter '08
 CHABOT

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