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Growth in GNP
E(Ri) =a0+bi1F1+bi2F2+………+binFn
An arbitrage opportunity will exist if the cost of this portfolio is different than the cost of
security C.
Cost of the portfolio is 0.4 x £70 + 0.6 x £60 = £64 - price of security C is
£80. The “synthetic” security is cheap relative to security C.
Example – Continued
no factor sensitivity
model
FACTOR MODELS
MULTIPLE-FACTOR MODELS
FORMULA
ri = ai + bi1 F1 + bi2 F2 +. . . + biKF K+ ei