Multifactor Models Suppose equity returns can be explained by the FamaFrench three-factor model. The firm-specific risks for
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Multifactor Models Suppose equity returns can be explained by the Fama–French three-factor model.
The firm-specific risks for all equities are independent. The following table shows the information for three diversified portfolios:
β γ δ E[R](%)
Portfolio A 0.75 1.20 0.04 18 Portfolio B 1.60 −0.20 0.07 14 Portfolio C 0.85 1.20 0.65 22 Assuming that the base return on each portfolio is 6 per cent and the risk free rate is 5 per cent, what are the risk premiums for each factor in this model?
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