Question 1

You have been hired as a consultant to advise a client on an appropriate measure of risk to use in judging the client's stock investments.What do you tell your client and why?

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Question 2

Discuss possible bias inherent in estimating the true Beta value according to Lintner and Douglas.What are the findings of Miller and Scholes on the basis of this evaluation?

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Question 3

Consider the following multi-index model: $R _ { \mathrm { it } } = R _ { F t } + \beta _ { i 1 } I _ { 1 t } + \beta _ { i 2 } I _ { 2 t } + \ldots + \beta _ { i j } I _ { j t } + e _ { i t }$ where: $R _ { it }$ is the return on asset i in period t $R _ { F t }$ is the risk-free rate in period $$t$$ $\beta _ { i j }$ is the sensitivity of asset $i$ to factor $j$  is the value of factor $j$ in period $t$ $e _ { i t }$ is a random error term for asset $i$ in period $t$ 
a. Assuming the APT holds, what is the expression for the expected return of asset i?
b. How can the APT be used in decision making?
c. Outline, in list form, the assumptions underlying the APT.

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Question 4

Explain how the zero Beta version of CAPM is derived.

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Question 5

List set of equity and fixed income factors that were shown to have generated historical premia.Define the value factor and its economic interpretation.

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Question 6

Explain the essential features of the following three lines: the Security Market Line,and the Capital Market Line.How is each used in discussions of security price behavior? Suppose you know that portfolio P is an efficient portfolio.What does this tell you about its position with respect to each of the lines?

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Quiz 3: Models of Equilibrium in the Capital Markets

You have been hired as a consultant to advise a client on an appropriate measure of risk to use in judging the client's stock investments.What do you tell your client and why?

Discuss possible bias inherent in estimating the true Beta value according to Lintner and Douglas.What are the findings of Miller and Scholes on the basis of this evaluation?

Explain how the zero Beta version of CAPM is derived.

List set of equity and fixed income factors that were shown to have generated historical premia.Define the value factor and its economic interpretation.