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Posted: February 5th, 2019

Finance 10 Problems Set

1.award:10.00points 2.award:10.00points 3.award:10.00points 4.award:10.00pointsIn a multifactor APT model, the coefficients on the macro factors are often calledsystemic risk.firm-specific risk.idiosyncratic risk.factor betas.Multiple Choice Difficulty: 1 BasicConsider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, anda beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What isthe risk-premium on factor 2 if no arbitrage opportunities exist?9.26%3%4%7.75%Multiple Choice Difficulty: 3 ChallengeThe exploitation of security mispricing in such a way that risk-free economic profits may be earned is calledarbitrage.capital asset pricing.factoring.fundamental analysis.None of the optionsMultiple Choice Difficulty: 1 BasicConsider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of a well-diversifiedportfolio on the factor is 1.1. The variance of returns on the well-diversified portfolio is approximately3.6%.6.0%.7.3%.10.1%.Multiple Choice Difficulty: 2 IntermediateAssignment Print View http://ezto.mheducation.com/hm.tpx1 of 5 02/12/2014 23:51 5.award:10.00points 6.award:10.00points 7.award:10.00pointsConsider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and abeta of .8 on factor 2. The risk premium on the factor 1 portfolio is 3%. The risk-free rate of return is 6%. What is therisk-premium on factor 2 if no arbitrage opportunities exist?2%3%4%7.75%Multiple Choice Difficulty: 3 ChallengeSuppose that two factors have been identified for the U.S. economy: the growth rate of industrialproduction, IP, and the inflation rate, IR. IP is expected to be 2%, and IR 2.0%. A stock with a beta of 0.9on IP and 0.4 on IR currently is expected to provide a rate of return of 6%. If industrial production actuallygrows by 4%, while the inflation rate turns out to be 4.0%, what is your revised estimate of the expectedrate of return on the stock? (Do not round intermediate calculations. Round your answer to 1decimal place. Omit the “%” sign in your response.) Revised expected rate ofreturn %Worksheet Difficulty: 1 BasicAssume that security returns are generated by the single-index model, Ri = ?i + ?iRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%.Suppose also that there are three securities A, B, and C, characterized by the following data:Security ?i E(Ri) ?(ei)A 1.5 6% 29%B 1.7 8 15C 1.9 10 24a. If ?M = 26%, calculate the variance of returns of securities A, B, and C. (Do not round intermediatecalculations. Round your answers to the nearest whole number.)Variance Security A Security B Security Cb. Now assume that there are an infinite number of assets with return characteristics identical to those ofA, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B,Assignment Print View http://ezto.mheducation.com/hm.tpx2 of 5 02/12/2014 23:51 8.award:10.00points 9.award:10.00pointsand C? (Enter the variance answers as a percent squared and mean as a percentage. Do notround intermediate calculations. Round your answers to the nearest whole number. Omit the”%” sign in your response.)Mean Variance Security A % Security B Security CWorksheet Difficulty: 2 IntermediateConsider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta Factor Risk Premium Inflation 1.0 9% Industrial production 0.5 10 Oil prices 0.2 8a. If T-bills currently offer a 8% yield, find the expected rate of return on this stock if the market views thestock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimalplace. Omit the “%” sign in your response.) Expected rate of return %b. Suppose that the market expected the values for the three macro factors given in column 1 below, butthat the actual values turn out as given in column 2. Calculate the revised expectations for the rate ofreturn on the stock once the “surprises” become known. (Do not round intermediate calculations.Round your answer to 1 decimal place. Omit the “%” sign in your response.) FactorExpected Rate ofChangeActual Rateof Change Inflation 8% 8% Industrial production 4 10 Oil prices 2 0 Expected rate of return %Worksheet Difficulty: 2 IntermediateSuppose that the market can be described by the following three sources of systematic risk withassociated risk premiums. Factor Risk PremiumAssignment Print View http://ezto.mheducation.com/hm.tpx3 of 5 02/12/2014 23:51 10.award:10.00points Industrial production (I) 8% Interest rates (R) 4 Consumer confidence (C) 6The return on a particular stock is generated according to the following equation:r = 16% + 1.6I + 0.8R + 1.30C + ea-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not roundintermediate calculations. Omit the “%” sign in your response.) Equilibrium rate of return %a-2. Is the stock over- or underpriced?OverpricedUnderpricedWorksheet Difficulty: 2 IntermediateAssume that security returns are generated by the single-index model, Ri = ?i + ?iRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%.Suppose also that there are three securities A, B, and C, characterized by the following data:Security ?i E(Ri) ?(ei)A 0.8 10% 25%B 1.0 12 10C 1.2 14 20a. If ?M = 20%, calculate the variance of returns of securities A, B, and C. (Do not round intermediatecalculations. Round your answers to the nearest whole number.)Variance Security A Security B Security Cb. Now assume that there are an infinite number of assets with return characteristics identical to those ofA, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B,and C? (Enter the variance answers as a percent squared and mean as a percentage. Do notround intermediate calculations. Round your answers to the nearest whole number. Omit the”%” sign in your response.)Mean Variance Security A % Security B % Security C %Worksheet Difficulty: 2 IntermediateAssignment Print View http://ezto.mheducation.com/hm.tpx4 of 5 02/12/2014 23:51Assignment Print View http://ezto.mheducation.com/hm.tpx5 of 5 02/12/2014 23:51

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