Problem answers

[Adam Gehr]

Here are the answers to the text problems.

21) We can construct a mix of A and F with a beta equal to 2/3 if we have
a portfolio containing 2/3 A and 1/3 F. 
The expected return on this portfolio would be:
10x2/3 + 4x1/3 = 8%.

We could buy E and sell the mix of 2/3 A and 1/3 F and earn 1% of the
amount bought and sold as pure profit.

22) There are a lot of possibilities all involving selling A and B and
buying C. e.g. buy C and sell a portfolio of 50% A and 50% B. or 1/3 A and
2/3 B will yield profits in all states. A rise in price of C to about
$50.50 will eliminate the arbitrage profits in the latter case.

23) If the economy is in APT equilibrium then
  14 = rf + 1.0xK
  14.8 = rf + 1.1xK
  Where rf is the risk-free rate and K is the market price of risk.

Solving, K=8 and rf=6, so the risk-free rate must be 6.