# No late homework will be accepted have the following

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Unformatted text preview: date is shown on each assignment text). No late homework will be accepted. have the following system of equations { The solution is , and . The return on this portfolio is (would you expect to get a different answer?) e) Sell the portfolio described above, buy risk-free and get 2% return without a systematic risk for free. Problem 2: Consider a financial market with three assets, whose returns are given by Where and are random variables that have zero mean. a) Construct a portfolio of these three assets that gives a risk-free return b) Now assume that in addition to the original assets there exists a risk-free asset with . For what value of the exact APT fulfilled and what are the factor risk premia in this case? c) Finally assume that . How can an investor use, that APT is not satisfied to earn money with no risk? Solution a) Invest part of your total planned investment in the first asset, in second asset and in third asset. Since we do not know whether risk-free asset exist, add the equation . The total return on your portfolio can be written as follows: ( ) ( ) Since and are the only random factors, if we make two brackets zero we will get the risk-free portfolio. The solution is , and . The return on the portfolio is . b) Only is consistent with the APT c) If there exists an asset with , short-sell this asset and buy the combination above to get “free” (absolutely no risk) return of 5%....
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## This note was uploaded on 03/04/2013 for the course MANAGEMENT 110 taught by Professor Black during the Fall '12 term at Hult International Business School.

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