Question

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 54%. 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			32	%
	B			2.6			–0.20			29	%

What is the expected return-beta relationship in this economy? Calculate the risk-free rate, r_f, 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(r_P) = r_f + (β_P1 × RP₁) + (β_P2 × RP

Rf?

RP1?

RP2?

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut AC Wrap Text Calibri 11 General E Copy Fill Sort & Find & Filter Select Merge & Center Paste В IU- $ % , 000 Conditional Format Cell Insert Delete Format KH Format Painter Clear Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fx ВТ601 BL ВM BN ВО ВР BQ BR BS ВТ BU BV BW EXPECTED RETURN-BETA RELATIONSHIP = E(rP) Rf beta1(P1) beta2(P2) Portfolio B 29% = 5% + 2.6(P1) +(-0.2) (P2) 24% 2.6(P1) +(-0.2) (P2) THIS IS A TWO FACTOR ECONOMY 584 Portfolio A = 32% = 5% + 1.6(P1) + 2.0(P2) 585 27%= 1.6(P1) + 2.0(P2) eq (1) eq(2) 586 587 ELIMINATION METHOD MULTIPLY eq(2) BY 10 588 EQUATION 1 AS IT IS 27%= 1.6(P1)+2.0(P2) 240%=26(P1) +-2.0) (P2) 267%=27.6 (P1) 589 [24%=2.6(P1) -0.2) (P2)] X 10 590 ADD 591 592 P1 9.6739% NOW eq(1) 27%= 1.6(P1) +2.0(P2) 593 27%= 1.6 39%) +2.0(P2) 594 27% = 15.478% + 2.0(P2) 595 P2 5.761% 596 597 EXPECTED RETURN-BETA RELATIONSHIP = E(rP) Rf beta1P1) beta2 (P2) = 5% +beta1 (9.67%) beta2 (5.76%) 598 Rf 599 5% 600 RP1 9.67% RP2 5.76% 601 602 KE CAPM UTILITY, SHARPE, beta LEASING DIR right RESI e DGM PV, FV, ANNUITY clean YIELD bond portfolio beta port future INDEX cap stru WACC coNvexity INTL CAP BUD erences: AG470 130% XУ W 05:41 ENG 23-11-2019