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)
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
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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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)
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