Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.9 B 2.8 rf RP1 RP2 Beta on F2 2.2 -0.22 % % % Expected Return 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. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (p1 x RP1) + (p2 × RP2) 33% 28%
Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.9 B 2.8 rf RP1 RP2 Beta on F2 2.2 -0.22 % % % Expected Return 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. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (p1 x RP1) + (p2 × RP2) 33% 28%
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 6%, and all stocks have
independent firm-specific components with a standard deviation of 43%. Portfolios A and B are both well-diversified with the
following properties:
Portfolio Beta on F1
A
1.9
B
2.8
rf
RP1
RP2
Beta on F2
2.2
-0.22
%
Expected
Return
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. (Do not round intermediate calculations. Round your answers to two
decimal places.)
E(rp) = rf + (p1 × RP1) + (P2 × RP2)
33%
28%
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