Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 5%, E(r2) = 3%, and E(r3) = 8%. Suppose further that the risk-free rate (λ0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, βA1 = 1.1, beta on the second factor, βA2 = .9, and beta on the third factor, βA3 = 1.2.
Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 5%, E(r2) = 3%, and E(r3) = 8%. Suppose further that the risk-free rate (λ0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, βA1 = 1.1, beta on the second factor, βA2 = .9, and beta on the third factor, βA3 = 1.2.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...
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Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 5%, E(r2) = 3%, and E(r3) = 8%. Suppose further that the risk-free rate (λ0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, βA1 = 1.1, beta on the second factor, βA2 = .9, and beta on the third factor, βA3 = 1.2.
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