Consider a Kyle (1985) model where the true value of the stock is $30, the unconditional variance of the true value is 25, the variance of uninformed trading is 3600 and the unconditional expected value of the stock is $25, i.e., E [ü] = 25, 0(2)/(3) = 25 = 30, 0, 3600. 1)The informed trader's optimal demand (based on the model) is: A. 60 B. 55 C. 65 D. 70 2)The informed trader's ex-ante profit is: A 180 B. 200 C. 150 D. 120 3) If noise trading u = -20. then price p is: A. 25.50 B. 26.68 C. 30.50 D. 28.50 4)Market maker's realized profit is and informed trader's realized profit is A. 132.80; 199.20 B. 132.80; 132.80 C. 199.20; 199.20 D. 152.50; 165.50

Consider a Kyle (1985) model where the true value of the stock is $30, the unconditional variance of the true value is 25, the variance of uninformed trading is 3600 and the unconditional expected value of the stock is $25, i.e., E [ü] = 25, 0(2)/(3) = 25 = 30, 0, 3600. 1)The informed trader's optimal demand (based on the model) is: A. 60 B. 55 C. 65 D. 70 2)The informed trader's ex-ante profit is: A 180 B. 200 C. 150 D. 120 3) If noise trading u = -20. then price p is: A. 25.50 B. 26.68 C. 30.50 D. 28.50 4)Market maker's realized profit is and informed trader's realized profit is A. 132.80; 199.20 B. 132.80; 132.80 C. 199.20; 199.20 D. 152.50; 165.50

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

See similar textbooks

Similar questions

Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Assume the CAPM holds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the market portfolio. The market portfolio's Sharpe ratio is 0.30 and the the risk-free rate is 5%. (a) What is Stock X's expected return? (b) What proportion of Stock X's return volatility (i.e. standard deviation) is priced by the market? Explain why this number is less than 1.
Consider a Kyle (1985) model where the true value of the stock is $30, the unconditional variance of the true value is 25, the variance of uninformed trading is 3600 and the unconditional expected value of the stock is $25, i.e., E[ü] = 25, 0(2)/(3) = 25 = 30,0, = 3600. 1)The informed trader's optimal demand (based on the model) is: A. 60 B. 55 C. 65 D. 70 2) The informed trader's ex- ante profit is: A . 180 B. 200 C. 150 D. 120 3) If noise trading u = -20. then price p is: A. 25.50 B. 26.68 C. 30.50 D. 28.50 4)Market maker's realized profit is_ and informed trader's realized profit is .-132.80; 199.20 B. -132.80; 132.80 C. 199.20; 199.20 D. 152.50; 165.50 A
a) Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices. b) We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. Given that the optimal proportion of the risky asset in the complete port- folio is given by the equation y* = E , where r; is the risk-free rate, E(rp) is the expected returm of the risky portfolio, o, is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse. Ao
When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.
Mean-variance expected utility is given by Eu = e-, where e is expected return, v is the variance of the portfolio and tis risk tolerance. Suppose an investor has risk-loving preferences. What can we say about the value of t? Select one: Ot1 O. t>0 O t=0
Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (βA) to beta of B (βB).
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB). please show all workings and not merely : Ra = 1/2 rbRf = 1/4 Ra
(Singular) Suppose there are two stocks that are uncorrelated. Each of these has variance of 1, and there are expected returns are 7₁ and 72, respectively. The risk-free rate is rf. Find the portfolio of weights w₁ and w2 for the Markowitz (market) portfolio. Show that for some value of rf there is no Markowitz portfolio.
Suppose you have mean-variance utility function with a coefficient of risk Aversion-0, which stocks are preferred to P. E(r) III IP II IV Standard Deviation
Consider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?