Assume both portfolios A and B are well diiversified, that ErA) = 14.4% and ErB 16.0%If the economy has only one risk factor, and BA 1 while BB= 1.2, what must be the risk-free rate? (Do not round intermediate calculations. Enter your answer as a percentagerounded to 1 decimal places.)Risk-free rate

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Asked Oct 29, 2019
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Assume both portfolios A and B are well diiversified, that ErA) = 14.4% and ErB 16.0%
If the economy has only one risk factor, and BA 1 while BB= 1.2, what must be the risk-
free rate? (Do not round intermediate calculations. Enter your answer as a percentage
rounded to 1 decimal places.)
Risk-free rate
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Assume both portfolios A and B are well diiversified, that ErA) = 14.4% and ErB 16.0% If the economy has only one risk factor, and BA 1 while BB= 1.2, what must be the risk- free rate? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal places.) Risk-free rate

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Expert Answer

Step 1

Under one factor model:

E(R) = Rf + Beta x Z where E(R) = expected return of a security, Rf = risk free rate, and Z = risk factor

Step 2

E(RA) = Rf + BetaA x Z 

Hence, 14.4% = Rf + 1 x Z             - Eqn (1)

E(RB) = Rf + BetaB x ...

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