Multifactor Models Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all

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Multifactor Models Suppose stock returns can be explained by a two-factor model.

The firm-specific risks for all stocks are independent. The following table shows the information for two diversified portfolios:

b1 b2 E(R)

Portfolio A .85 1.15 16%

Portfolio B 1.45 2.25 12 If the risk-free rate is 4 percent, what are the risk premiums for each factor in this model?

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