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10 Assume there are two independent factors, Fl and F2. The risk-free rate is 5%, and all stocks returns have independent firm-specific random components with
10 Assume there are two independent factors, Fl and F2. The risk-free rate is 5%, and all stocks returns have independent firm-specific random components with a standard deviation of 25%. Portfolios A and B are both well diversified. The expected return on Portfolio A is 35%, its beta on Factor F1 is 1.5 and its beta on Factor F2 is 1.75. The expected return on Portfolio B is 15%, its beta on Factor F1 is 1 and its beta on Factor F2 is 1.5. Which equation below provides the correct pricing model? Your choice: 10/25 Qs EO) = 5% - 30%B1+ 55%B2 ET) = 5% + 55%B1-30%B2 El 1) = 5% +9.68%B1 +8.71%B2 E(1) = 5% + 8.71%1 +9.68%B2 Elt) = 5% +3.23%B1 + 8.46%B2
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