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nexus9112 [7]
3 years ago
5

Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 19%. Portfolio B has a beta of 1.0 and an

expected return of 8%. The risk-free rate of return is 3%. You can create a portfolio D which invests ____% in portfolio A and the rest in the risk-free asset so that it has the same beta as portfolio B, and compare the returns to portfolio D and portfolio B to decide the direction of arbitrage trading.
Business
1 answer:
Aleksandr-060686 [28]3 years ago
7 0

Answer:

Invest 50% in portfolio A and the rest 50% in risk-free asset to create Portfolio D, we will have the same systematic risk as that of Portfolio B.

The expected return of Portfolio D = 11%

Portfolio D and Portfolio B have the same beta of 1.0. But, portfolio D has a higher return of 11% as compared to the expected return of Portfolio B of 8%.

Buy Portfolio D, and sell Portfolio B.

Explanation:

A risk free asset is referred to an asset that provides a virtually guaranteed return and no possibility of loss.

Risk-free asset has a beta of 0.

Portfolio D Beta = Wa × Portfolio A Beta + Wb × Risk-free asset beta

1.0 = Wa * 2.0 + Wb * 0

Wa = 1.0/2.0

Wa = 0.50

If we invest 50% in portfolio A and the rest 50% in risk-free asset to create Portfolio D, we will have the same systematic risk as that of Portfolio B.

The expected return of Portfolio D = 0.50 × 0.19 + 0.50 ×0.03

The expected return of Portfolio D = 0.11

The expected return of Portfolio D = 11%

Portfolio D and Portfolio B have the same beta of 1.0. But, portfolio D has a higher return of 11% as compared to the expected return of Portfolio B of 8%.

Buy Portfolio D, and sell Portfolio B.

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Look at their competitors positions of their products and take that into account.

Hope this helps

Explanation:

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3 years ago
True or False & Why? “Every time price goes up, demand goes up and every time price falls, demand falls too, and so on ad in
deff fn [24]

Answer: ▶False◀

Explanation:▶ realistically when prices fall, demand goes up. This is because everyone would buy something that cost less, than something that is expensive. Now when prices go up, demand usually goes down. This is because the consumer wouldn't want to buy something from ( ex:) retailer 1, who's products are too expensive. Than retailer 2, who's prices are very reasonable. People wouldn't want to demand something that has a price going up and up.

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2 years ago
What is the difference between 1st,2nd, and 3rd degree murder?
SpyIntel [72]
1st on purpose, 2nd on accident but wanted to kill them, 3rd on accident with no intent.
7 0
3 years ago
The cross-price elasticity of demand measures the a. percentage change in the quantity demanded of one good in one location divi
LenaWriter [7]

Answer:

d. percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Explanation:

Price-demand elasticity measures the demand sensitivity of a good when a change in the price of another good occurs. For example, what happens to the demand for bread when the price of butter varies? This depends on the cross elasticity of demand since these goods tend to be complementary.

 The price elasticity of cross demand between two goods is easily calculated by a formula where the numerator is the change in the quantity of a good and the denominator is the percentage change in the price of the complementary good.

If the calculation of elasticity is greater than 1, it means that the amount demanded for bread is sensitive (elastic) to the price of butter and tends to vary sharply. If the result is between 0 and 1, the demand is inelastic, that is, the amount of bread demanded will not change considerably when the price of butter varies. If the calculation is equal to 1, then the demand for bread varies perfectly with the price of butter.

5 0
3 years ago
Our company manufactures and sells calculators for $90 each. A major University has offered us $70 per calculator for a one-time
sergiy2304 [10]

Answer:

Increase in operating income by $5,000

Explanation:

Firstly, we shall compute the additional cost of this order,

Variable Cost = Direct material + Direct Labor + Variable factory overhead

= $25 + $20 + $15 = $60

Note: Fixed cost will not form part of this decision, as the company has additional capacity lying idle, thus no additional fixed cost will be incurred, and the fixed cost allocated i.e. $12 per unit is not relevant, as is just allocation and not incurred, it is a kind of sunk cost allocated.

Relevant cost = $60 per unit

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Contribution to profit = $70 - $60 = $10 per unit

Total increase in operating income = $10 \times 500 = $5,000

Thus operating income will increase by this amount.

Increase in operating income by $5,000

8 0
3 years ago
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