Multifactor Models Suppose stock returns can be explained by the following three factor model:
The risk premiums for the factors are 6.1 percent, 5.3 percent, and 5.7 percent, respectively. If you create a portfolio with 20 percent invested in Stock A , 20 percent invested in Stock B , and the remainder in Stock C , what is the expression for the return on your portfolio? If the risk-free rate is 3.2 percent, what is the expected return on your portfolio?
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