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Suppose that we know that IBM and DELL are going to pay a liquidating dividend in exactly one year, and this is the only payment that they will make. However, the dividend that IBM and DELL pay is uncertain and depends on how well the economy is doing. If the economy is in an expansion, then IBM will pay a dividend of 140, while DELL will pay a dividend of 160. . However, if the economy is in a recession, then IBMs dividend will be 100, while DELLs dividend will be only 80. The two states are equally likely. Thus, both rms are exposed to the business cycle factor. The factor loading of IBM on the business cycle factor is bIBM;BC = 0:4, while the factor loading of DELL is bDELL;BC = 0:8889. Suppose that the risk-free in the economy is 5%. If IBM stock price is $100, how much are you willing to pay for DELL stock

Problem 2. (4 points) There are three assets with returns r, r2, T3, whose variation is completely explained by two factors Fi and F2: = 0.04 + 2F-F2 r2 = 0.11 +3Fi rg = 0.08-6Fi + 3F2 Suppose that the factors are demeaned (E(F) = E(A) = 0) and uncorrelated 1. Construct two portfolios with the three assets that have factor loadings (1,0) and (0, 1) respectively (one portfolio has exposure only to Fi, and the second has exposure only to F2)? What is the portfolios expected return? 2. Construct a portfolio with the three assets that have factor loadings (0, 0) 3. What is the risk free rate in the economy? What are the portfolios' risk premia? Problem 3. (2 points) Suppose that we know that IBM and DELL are going to pay a liquidating dividend in exactly one year, and this is the only payment that they will make. However, the dividend that IBM and DELL pay is uncertain and depends on how well the economy is doing. If the economy is in an e a dividend of 160. However, if the economy is in a recession, then IBM's dividend will be 100, while DELL's dividend will be only 80. The two states are equally likely. Thus, both firms are exposed to the business cycle factor. The factor loading of IBM on the business cycle factor is bIBM.BC = 0.4, while the factor loading of DELL is bDELL,BC Suppose that the risk-free in the economy is 5%. If IBM stock price is $100, how much are you willing to pay for DELL stock? xpansion, then I BM will pay a dividend of 140, while DELL will pay 0.8889

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