Unformatted text preview: premiums. To find the APT equation we need to solve the system of equations
The APT equation is
b) The easiest way to create this portfolio is to invest 2/3 of wealth in each of t he three
assets and borrow 1.0 of wealth at risk free rate. The return on this portfolio is 20%.
c) If we invest 1/3 of our wealth in each portfolio we get expected return 14% and
sensitivity to factors will be 1.0 and 0.0. If the return on asset
is 15% we should buy
this asset and sell (1/3,1/3,1/3) portfolio. We will get positive expected return with zero
wealth investment and zero sensitivity to factors.
d) We invest to first asset, to second asset and to third asset (since risk-free asset
exists the sum does not need to be equal 1 but we can add it as an extra restriction). We
1 Homework assignments must be submitted electronically (word or PDF file sent to [email protected] with subject
“Corporate Finance I: Email Submission”, case sensitive) or paper form (printed or handwritten work given before classes) no
later than the next lesson (due...
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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