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Free_Kalibri [48]
3 years ago
10

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-sp

ecific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9
Mathematics
1 answer:
OLEGan [10]3 years ago
3 0

Answer:

<em> E(rP) = 4% + 5.50% x β(M1) + 10.92% x β(M2)</em>

Step-by-step explanation:

l<em>et us recall from the following statement:</em>

<em>The  two independent economic factors are M1 and M2</em>

<em>Th risk free rate = 4%</em>

<em> The standard deviation of all stocks of  independent firm specific components is =49%</em>

<em>P = portfolios for A and B</em>

<em>Now, </em>

<em>What is the expected relationship of return-beta </em>

<em>The Expected return-beta relationship E(rP) =  % +  βp₁ +  βp₂</em>

<em>E(rA) = 4% + 1.6 * M1 + 2.4* M2 = 39% </em>

<em> E(rB) = 4% + 2.3 * M1 + (-0.7)* M2 = 9% </em>

<em> Therefore </em>

<em>Solving for M1 and M2 using excel solver, we have M1 = 5.50% and M2 = 10.92% </em>

<em> E(rP) = 4% + 5.50% x β(M1) + 10.92% x β(M2)</em>

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The best option depends on how many songs you plan to purchase.

Option 1 will be the best option if you wish to purchase an unlimited amount of songs or more than 16 per month for the total cost of one year of $245. It's modeled by the equation y=10x+125 where x is months and y is total annual cost.

Option 2 will be the best option if you wish to purchase less than 16 songs a month. This would be 16(12) = 192 songs a year. To stay under the cost of option 1 you can buy only 195 songs in a year. Paying for each song individually at $1 plus a lower annual fee will result in you spending $242 dollars a year or less if you purchase less songs. It's modeled by the equation y=1s+50 where s is the number of songs downloaded in a year and y is total annual cost.

Because your average of 14 songs a month is less than 16 songs a month, option 2 is your best option. You will download all the songs you normally do and pay less than option 1. Your cost under Option 1 would be $245. Your cost under Option 2 would be $218.

Step-by-step explanation:

Each option in the electronic music club represents a linear function. Each option has a constant rate of change charged per month or song. This is your slope. Each option has a one time annual fee charged. This is your y-intercept.

Option 1 has a constant rate (m) of $10 per month with an annual fee (b) of $125. Using Slope-Intercept form, y=mx+b, we can write the function y=10x+125 where x is number of months and y is total cost in 12 months.

Option 2 has a constant rate (s) of $1 per song with an annual fee (b) of $50. Using Slope-Intercept form, y=mx+b, we can write the function y=1s+50 where s is number of songs and y is total cost in 12 months.

We know the total annual cost of Option 1 by substituting x=12 months to represent a year.

y=10(12)+125=120+125=245.

We find when Option 2 will be the same cost by substituting y=245 into y=1s+50 and solve for s.

245=1s+50

245-50=1s+50-50

195=1s

This means that both options will be the same cost for one year if we purchase 195 songs that year. If we purchase more, than Option 1 is the best choice. If we purchase less than 195, Option 2 remains the best choice.

Lastly, if your average number of songs is 14 per month, we can find 14(12)=168 songs in a year. This is lower than 195. Thus option 2 is the best answer for you.



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