Suppose that there are two independent economic factors, F₁ and F2. The risk-free rate is 10%, and all stocks have independent firm- specific components with a standard deviation of 40%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.6 2.5 B rf RP1 RP2 Beta on F2 Expected Return 2.0 -0.20 Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp) = rf + (BP1 x RP1) + (BP2 × RP2) Answer is complete but not entirely correct. 10.00 % 12.50% 75.00 % 30% 25%
Suppose that there are two independent economic factors, F₁ and F2. The risk-free rate is 10%, and all stocks have independent firm- specific components with a standard deviation of 40%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.6 2.5 B rf RP1 RP2 Beta on F2 Expected Return 2.0 -0.20 Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp) = rf + (BP1 x RP1) + (BP2 × RP2) Answer is complete but not entirely correct. 10.00 % 12.50% 75.00 % 30% 25%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose that there are two independent economic factors, F₁ and F2. The risk-free rate is 10%, and all stocks have independent firm-
specific components with a standard deviation of 40%. Portfolios A and B are both well-diversified with the following properties:
Portfolio Beta on F1
A
1.6
B
2.5
"f
Beta on F2 Expected Return
2.0
-0.20
Required:
What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2
to complete the equation below.
Note: Do not round intermediate calculations. Round your answers to 2 decimal places.
E(rp) = rf + (BP1 x RP1) + (BP2 × RP2)
Answer is complete but not entirely correct.
10.00 %
12.50 %
75.00 %
RP1
RP2
30%
25%
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