Question

Paragraph Styles Suppose that there are two independent economic factors, F and F2. The risk-free rate is 10%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well-diversified with the following properties: PortfolioBeta on Fi Beta on F2 1.2 2.0 3.1 0.20 Expected Return 28% 23% What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP, and RP2, to complete the equation below. Elrel=r+ (BP1 * RP.) + (Bp2 * RP2) RP1 RP2

Answer 1

Equation Pup) = nf + Bie [E(81) - st I + Bze [E (82) - 4.3. Risic Premium for tuw facters rel= [E(rl) - if I wow uit vitlust 062 = [E(82)- rf.3. Equation genuated are. X IE t vol = odbe Er = rf + Bapst Bopz ENC tool oss 28 = 10 + logopi + 2.0 MP2 - 23 = 10+ 3. lap1 & 0.2 ap2 - ② multiply both sidy by lo in eq ② 230 = 100+ 31 sp1 & 2.0 rp2 t 20 = 10 + 1.2ap1 + 2%op2 258 - 110 + 32.4 spil

958 = 10 + 32.20$ 1991 148= 32.2appt meiner Tapi = 4.60) - ) putting the value in eq 2 230 = 100 + 31 4.6 & 2 opa up 230=100+ 142.6 4 2 2p 2 at the 230 = 242.6- 2012 ispiel to 12.6i & ap2 Jup2 = 6.3 Relationstup Elup) = 10% + B. 4.6.lt 82. 6.3%.