Ans_Problem_Set_8_09

Ans_Problem_Set_8_09 - Princeton University Department of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Princeton University Department of Economics Economics 362 Fall Term 2009-2010 Problem Set 8 Multi-Factor Models Use the following to answer questions 1-2: Consider the multifactor APT. There are two independent economic factors, F 1 and F 2 . The risk-free rate of return is 6%. The following information is available about two well- diversified portfolios: Portfolio on F 1 on F 2 Expected Return A 1.0 2.0 19% B 2.0 0.0 12% 1. Assuming no arbitrage opportunities exist, the risk premium on the factor F 1 portfolio should be __________. A) 3% B) 4% C) 5% D) 6% E) none of the above Answer: A Rationale: 2A: 38% = 12% + 2.0(RP1) + 4.0(RP2); B: 12% = 6% + 2.0(RP1) + 0.0(RP2); 26% = 6% + 4.0(RP2); RP2 = 5; A: 19% = 6% + RP1 + 2.0(5); RP1 = 3%. 2. Assuming no arbitrage opportunities exist, the risk premium on the factor F 2 portfolio should be ___________. A) 3% B) 4% C) 5% D) 6% E) none of the above Answer: C Rationale: See solution to previous problem. Rationale: See solution to previous problem....
View Full Document

This note was uploaded on 01/15/2011 for the course ECO 362 at Princeton.

Page1 / 2

Ans_Problem_Set_8_09 - Princeton University Department of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online