Suppose that there are two independent factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 42%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.8 2.1 32% B 2.7 -0.21 27% 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 (write answers as percentages, rounded to two decimal places).
Suppose that there are two independent factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 42%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.8 2.1 32% B 2.7 -0.21 27% 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 (write answers as percentages, rounded to two decimal places).
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 factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 42%. Portfolios A and B are both well-diversified with the following properties:
| Portfolio | Beta on F1 | Beta on F2 | Expected Return |
| A | 1.8 | 2.1 | 32% |
| B | 2.7 | -0.21 | 27% |
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 (write answers as percentages, rounded to two decimal places).
E(rp) = rf + (BP1 X RP1) + (BP2 X RP2) (Note: B = Beta)
| rf | ?% |
| RP1 | ?% |
| RP2 | ?% |
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