This preview shows page 1. Sign up to view the full content.
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
c) Finally assume that
. How can an investor use, that APT is not satisfied to earn
money with no risk?
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:
are the only random factors, if we make two brackets zero we will get
the risk-free portfolio. The solution is
. The return on
the portfolio is
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%....
View Full Document
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