solve12 - FNCE 3010(Durham HW 12(Misc topics 1 Consider a...

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FNCE 3010 (Durham) HW 12 (Misc. topics) 1. Consider a two factor APT model for stock returns. Suppose that the risk premia are λ 1 = 4% and λ 2 = 7%. Now consider an asset whose factor loadings are β 1 = - 2 and β 2 = 3. If the risk-free rate is 5%, what is the asset’s expected return? Solution: ER = 5 - (2 x 4) + (3 x 7) = 18%. 2. For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the market is weak form but not semistrong form efficient, (3) the market is semistrong form but not strong form efficient, and (4) the market is strong form efficient. (a) The stock price has risen steadily each day for the past 30 days. (b) The financial statements for a company were released three days ago, and you believe you’ve uncovered some anomalies in the company’s inventory and cost control reporting techniques that are causing the firm’s true liq- uidity strength to be understated.
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