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 Beta on F2 Expected Return   A     1.6     2.0     30 %   B     2.5     –0.20     25 %   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. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rP) = rf + (βP1 × RP1) + (βP2 × RP2)

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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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 Beta on F2 Expected Return
  A     1.6     2.0     30 %
  B     2.5     –0.20     25 %
 


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. (Do not round intermediate calculations. Round your answers to two decimal places.)

E(rP) = rf + P1 × RP1) + P2 × RP2)

 
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