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Ive been having problems with the posted problem set on Blackboard. Is it possible that these problems are from a previous quarter and that we maybe haven't covered all the material yet?<BR> <BR>> Date: Sun, 26 Apr 2009 18:26:31 -0500<BR>> From: agehr@mozart.depaul.edu<BR>> To: fin525sp09@mailman.depaul.edu<BR>> Subject: Re: [Fin525sp09] Question on Midterm problem #3<BR>> <BR>> You don't need a risk-free rate. All you need to do is buy and sell <BR>> portfolios which have the same factor-sensitivities. With three <BR>> securities you can find a combination of two which replicate the factor <BR>> sensitivity of the third (and it doesn't matter which you pick--you will <BR>> get the same result). Check the expected returns to find out which to <BR>> sell and which to buy. If you get the same return on all combinations <BR>> with the same factor sensitivity, you have an equilibrium. Otherwise you <BR>> have an arbitrage opportunity.<BR>> <BR>> In this example, I'd try to find the easiest way to mix <BR>> securities--combine the high and low sensitivity securities to match the <BR>> sensitivity of the middle one. Then calculate expected returns.<BR>> <BR>> Adam Gehr<BR>> <BR>> <BR>> <BR>> patrick Redmond wrote:<BR>> > Professer Gehr -<BR>> > <BR>> > I do not understand question #3 on the sample midterm; could you <BR>> > provide some information on this probem?<BR>> > <BR>> > Spcifically, how to start this problem without a Risk-free rate. I <BR>> > understand how to constitute an arbitrage, but not with the <BR>> > information provided.<BR>> > <BR>> > Thanks in advance for your help,<BR>> > <BR>> > Kevin Redmond<BR>> ><BR>> > ------------------------------------------------------------------------<BR>> > Rediscover Hotmail®: Get quick friend updates right in your inbox. <BR>> > Check it out. <BR>> > <http://windowslive.com/RediscoverHotmail?ocid=TXT_TAGLM_WL_HM_Rediscover_Updates2_042009> <BR>> ><BR>> > ------------------------------------------------------------------------<BR>> ><BR>> > _______________________________________________<BR>> > Fin525sp09 mailing list<BR>> > Fin525sp09@mailman.depaul.edu<BR>> > http://mailman.depaul.edu/mailman/listinfo/fin525sp09<BR>> > <BR>> <BR>> _______________________________________________<BR>> Fin525sp09 mailing list<BR>> Fin525sp09@mailman.depaul.edu<BR>> http://mailman.depaul.edu/mailman/listinfo/fin525sp09<BR><br /><hr />Windows Live™ Hotmail®:…more than just e-mail. <a href='http://windowslive.com/online/hotmail?ocid=TXT_TAGLM_WL_HM_more_042009' target='_new'>Check it out.</a></body>
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