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This problem explores the idea behind APT and factor models. Suppose the statistical properties of all asset returns are described by a single factor model where the market is the single factor. In particular, you can assume that there is a market portfolio and a risk-free asset that both satisfy the factor model equation in class (and in BKM).
In parts (a) through (c), consider a well-diversified portfolio A with βA = 0.4 and αA = 2.0.
a) Combine this portfolio with the market portfolio to form a zero-beta portfolio. Calculate the weightings and alpha of your zero-beta portfolio. [Hint: what are the alpha and beta of the market portfolio?]
b) Calculate the systematic, idiosyncratic and total risk of your zero-beta portfolio in (a)?
c) In light of your answers to (a) and (b), construct a zero-cost (riskless) arbitrage strategy using the zero-beta portfolio and the risk-free asset. [Recall that a zero-cost arbitrage strategy will involve buying one asset and short selling another in equal amounts]. What is the alpha of your zero-cost strategy? How much money would an investor invest in such a strategy?
The company's weighted average cost of capital is WACC = 12%. a. What is the terminal, or horizon, value of operations? b. Calculate the value of Brooks' operations.
GoGoGUCity Inc. plans to issue a perpetual callable bond that pays 10.24% annual coupons. The current interest rate is 8%. Two years later, there is 28% probabi
Shock Electronics sells portable heaters for $35 per unit, and the variable cost to produce them is $22. Mr. Amps estimates that the fixed costs are $97,500. What is the break even point?
How are total risk, nondiversifiable risk, and diversifiable risk related? Why is nondiversifiable risk the only relevant risk
commonwealth company has 100 bonds outstanding maturity value 1000. the required rate of return on these bonds is
Your uncle is a proud owner of an up-market clothing store. Because business is down he is considering replacing the languishing tie department.
Identify the accounting items for which adjustments are made to the invoice price of goods when determining the net cost of purchases.
Classify each of the following as a financial liability, an operating liability, or neither.
The S&P 500 index has a dividend yield of 7.25 percent. Suppose you enter into a 11.0 month forward contract to buy S&P 500 index.
you have won a contest and now must decide which prize you want. with prize a you receive 5000 today and another 5500
What is the future value, five years from now, of sixty $100 cash flows using a periodic interest rate of 0.7% compounded monthly? The cash flows are made at the end of each month.
A. How much is this promise worth today if the appropriate discount rate is 10%?
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