Questions from General Investment

Q: Assume a universe of n (large) securities for which the

Assume a universe of n (large) securities for which the largest residual variance is not larger than n σM2. Construct as many different weighting schemes as you can that generate well diversified port...

Q: Small firms generally have relatively high loadings (high betas) on

Small firms generally have relatively high loadings (high betas) on the SMB (small minus big) factor. a. Explain why this is not surprising. b. Now suppose two unrelated small firms merge. Each will b...

Q: George Stephenson’s current portfolio of $2 million is invested as follows

George Stephenson’s current portfolio of $2 million is invested as follows: Stephenson soon expects to receive an additional $2 million and plans to invest the entire amount in an in...

Q: The APT itself does not provide guidance concerning the factors that one

The APT itself does not provide guidance concerning the factors that one might expect to determine risk premiums. How should researchers decide which factors to investigate? Why, for example, is indus...

Q: If the APT is to be a useful theory, the number

If the APT is to be a useful theory, the number of systematic factors in the economy must be small. Why?

Q: Suppose that there are two independent economic factors, F1 and F2

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 45%. Portfolios A an...

Q: Consider the following data for a one-factor economy. Both

Consider the following data for a one-factor economy. Both portfolios are well diversified. Suppose that another portfolio, portfolio E, is well diversified with a beta of .6 and expected return of 8%...

Q: Assume that both portfolios A and B are well diversified, that

Assume that both portfolios A and B are well diversified, that E(rA) = 12%, and E(rB) = 9%. If the economy has only one factor, and βA = 1.2, whereas βB = .8, what must be the risk-free rate?

Q: Assume that stock market returns have the market index as a common

Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1 on the market index. Firm-specific returns all have a standard deviation...

Q: Assume that security returns are generated by the single-index model

Assume that security returns are generated by the single-index model, where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Sup...