3330 PS8 (1)

3330 PS8 (1) - Cornell University Fall 2010 Economics 3330...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Cornell University Fall 2010 Economics 3330: Problem Set 8 Due 11/4/10 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. If a company announces an increase in its annual earnings, its share price should appreciate. b. According to the CAPM model, all securities should lie on the SML. 2. Two-factor APT Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 35%. There are two well-diversified portfolios. Portfolio A has the following characteristics: the beta on F 1 is 1.0 and on F 2 is 2.0. The expected return is 21%. For Portofolio B, the Beta on F 1 is 2.0 and the Beta on F 2 is 1.0, with an expected return of 18%. What is the expected return –beta relationship? 3.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Ask a homework question - tutors are online