3330 PS8 sol

3330 PS8 sol - Cornell University Fall 2010 Economics 3330:...

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

View Full Document Right Arrow Icon
Cornell University Fall 2010 Economics 3330: Problem Set 8 Solutions 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. False. The market may expect a larger increase. b. According to the CAPM model, all securities should lie on the SML. True. In the CAPM model, investors use the same input list and the same risk-return relationships, so all securities will fall 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? Equation 10.9 applies here:
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/06/2011 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell.

Page1 / 2

3330 PS8 sol - Cornell University Fall 2010 Economics 3330:...

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