[Fin525sp09] Question on Midterm problem #3

[Chris Kula]

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?
 
> Date: Sun, 26 Apr 2009 18:26:31 -0500
> From: agehr at mozart.depaul.edu
> To: fin525sp09 at mailman.depaul.edu
> Subject: Re: [Fin525sp09] Question on Midterm problem #3
> 
> You don't need a risk-free rate. All you need to do is buy and sell 
> portfolios which have the same factor-sensitivities. With three 
> securities you can find a combination of two which replicate the factor 
> sensitivity of the third (and it doesn't matter which you pick--you will 
> get the same result). Check the expected returns to find out which to 
> sell and which to buy. If you get the same return on all combinations 
> with the same factor sensitivity, you have an equilibrium. Otherwise you 
> have an arbitrage opportunity.
> 
> In this example, I'd try to find the easiest way to mix 
> securities--combine the high and low sensitivity securities to match the 
> sensitivity of the middle one. Then calculate expected returns.
> 
> Adam Gehr
> 
> 
> 
> patrick Redmond wrote:
> > Professer Gehr -
> > 
> > I do not understand question #3 on the sample midterm; could you 
> > provide some information on this probem?
> > 
> > Spcifically, how to start this problem without a Risk-free rate. I 
> > understand how to constitute an arbitrage, but not with the 
> > information provided.
> > 
> > Thanks in advance for your help,
> > 
> > Kevin Redmond
> >
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