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10.289113343 0.280113 22.04766298 8.00214E-06 108 1.389989243 0.013113 107 1.679102587 Residual Total er pso% er 55% Lower950%.U Lower 95% 0.016016831 0.011084408 1.447509 0.150880288 -0.005919434 0.037953096 -0.005919434 0 03793006 1.164323288 0.247966095 4695494 8.00214E-06 0.672708385 1.655940187 0.672706385 1.855940187 tStar Avalue Standard Error X Variable 1 a. What's the beta of Amazon? (5 points) b. Is beta statistically significant? Explain why. (5 points) c. How much (what percentage) of the Amazon's total risk is systematic? How much (what percentage) of the Amazon's total risk is idiosyncratic? (10 points) You have a well-diversified portfolio P. You believe that the return of P is exposed to 2 systematic risk factors, market risk (M) and exchange rate risk (X). The sensitivity of P's return to M is 1.2 and to X is 0.7. You have estimated the expected excess return of factors M and X are 7% and 3% respectively 4. Page 3 of 5 Security Market Line (CAPM): Decomposing the variance of return: R2 = According to APT, how much excess return should you expect on portfolio P? (15 points) If your analysis shows that portfolio P's expected excess return is i 396, how much i mispricing (a)? (5 points) a. b. c. Let's assume that there is portfolio PM that has unit sensitivity to factor M and zero sensitivity to factor X. Its expected excess return is 7%. Let's also assume that there is portfolio PX that has unit sensitivity to factor X and zero sensitivity to factor M. Its expected excess return is 3%. I combine P, PM, PX and risk-free with weights 1,-1.2,-0.7 and 0.9 respectively, and make portfolio A. Is A an arbitrage portfolio? Why? (Hint: a portfolio is an arbitrage portfolio if it has a positive expected excess return, no risk and zero initial investment) (20 points) 10.289113343 0.280113 22.04766298 8.00214E-06 108 1.389989243 0.013113 107 1.679102587 Residual Total er pso% er 55% Lower950%.U Lower 95% 0.016016831 0.011084408 1.447509 0.150880288 -0.005919434 0.037953096 -0.005919434 0 03793006 1.164323288 0.247966095 4695494 8.00214E-06 0.672708385 1.655940187 0.672706385 1.855940187 tStar Avalue Standard Error X Variable 1 a. What's the beta of Amazon? (5 points) b. Is beta statistically significant? Explain why. (5 points) c. How much (what percentage) of the Amazon's total risk is systematic? How much (what percentage) of the Amazon's total risk is idiosyncratic? (10 points) You have a well-diversified portfolio P. You believe that the return of P is exposed to 2 systematic risk factors, market risk (M) and exchange rate risk (X). The sensitivity of P's return to M is 1.2 and to X is 0.7. You have estimated the expected excess return of factors M and X are 7% and 3% respectively 4. Page 3 of 5 Security Market Line (CAPM): Decomposing the variance of return: R2 = According to APT, how much excess return should you expect on portfolio P? (15 points) If your analysis shows that portfolio P's expected excess return is i 396, how much i mispricing (a)? (5 points) a. b. c. Let's assume that there is portfolio PM that has unit sensitivity to factor M and zero sensitivity to factor X. Its expected excess return is 7%. Let's also assume that there is portfolio PX that has unit sensitivity to factor X and zero sensitivity to factor M. Its expected excess return is 3%. I combine P, PM, PX and risk-free with weights 1,-1.2,-0.7 and 0.9 respectively, and make portfolio A. Is A an arbitrage portfolio? Why? (Hint: a portfolio is an arbitrage portfolio if it has a positive expected excess return, no risk and zero initial investment) (20 points)

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