<html><head><style type='text/css'>p { margin: 0; }</style></head><body><div style='font-family: Arial; font-size: 12pt; color: #000000'><P>Good morning Professor. Is it possible for you to post the solutions for the 17 problems that you posted last week? </P>
<P><BR>----- Original Message -----<BR>From: "Eishita Shah" <eishita@live.com><BR>To: fin525sp09@mailman.depaul.edu<BR>Sent: Monday, April 27, 2009 9:34:06 AM GMT -06:00 US/Canada Central<BR>Subject: [Fin525sp09] Sample Midterm problem #3<BR><BR>
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<BR>Hello Professor,<BR><BR>For problem 3, we are given sensitivity coefficient (B) and Expected <BR>returns E(r), however to use two portfolios to derive at the common <BR>factor (m) for this one-factor model, we still need a remainder risk (alpha). Then using the factor, we derive at security retun r(i). My question is: is this alpha the same for all three equations? Only with aplha being the same, can we derive at R(m).<BR><BR>How is it possible for this remainder risk to be the same for all three portfolios? Is this an assumption we make for the sake of the <BR>problem?<BR><BR>Following are the equations I am using to derive first at R(m) and then at alpha. I am probably not using correct formulas for appropriate calculations, as my answers are incompatible with yours.<BR><BR>a = alpha; m = factor<BR>Solving for m:<BR>For A: 12 = a + 2m<BR>For B: 15 = a + 3m<BR>For C: 10 = a + m<BR> <BR>I obtained m = 3, and a = 6. Using m only I solved for r(i) = E(r) + m<BR>For A, r(a) = 18<BR>For B, r(b) = 24<BR>For C, r(c) = 13<BR> <BR>Please Advise!<BR><BR>Thanks,<BR>Eishita<BR>> ><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 <BR>> > 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 <BR>> > 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 <BR>> > 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>> > ------------------------------------------------------------------------<BR>> > > > Rediscover Hotmail®: Get quick friend updates right in your inbox.<BR>> > > > Check it out.<BR>> > > > <BR>> > <http://windowslive.com/RediscoverHotmail?ocid=TXT_TAGLM_WL_HM_Rediscover_Updates2_042009> <BR>> ><BR>> > > ><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>> > ------------------------------------------------------------------------<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></P>
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