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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 riskfree 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 riskfree return
b) Now assume that in addition to the original assets there exists a riskfree 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 riskfree 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 riskfree 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
, shortsell 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.
 Fall '12
 Black

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