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:
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
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