TOPIC : Term Structure of Interest Rates: Expectations Theory: Forward and SpotRates
QUESTION: Given the yield on a 7 year zero-coupon bond is 7%, yield on a 2 year strip is 5%, and forward two-year rate of 8% in year 5 (aka R5-7), what must be the forward three-year rate in year 2 (akaR2-5)?
Based on a single-factor model, assume that the risk-free rate is 6% and the expected return on a portfolio with unit sensitivity to the factor is 85% Consider a portfolio of two securities with the following characteristics:
SECURITY b(beta) SENSITIVITY PROPORTION
A 40 30
B 26 70
According to APT (Arbitrage Pricing Theory), what is the portfolio’s equilibrium expected return?
I want to understand “expected return on a portfolio with unit sensitivity to the factor vs what if its not unit sensitivity, but some other sensitivity?”
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