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:

INTERMEDIATE

(Questions 5–7)

1 2 E(R)

Portfolio A 0.75 1.20 18%

Portfolio B 1.60 0.20 14 If the risk-free rate is 6 percent, what are the risk premiums for each factor in this model? LO.1