Hello,

Need help with the following problem: Provide answer on excel please

4. Consider the following information about two stocks (D and E) and two common risk factors

(1 and 2):

Stockbi1bi2E(Ri )

D1.23.413.1%

E2.62.615.4%

a. Assuming that the risk-free rate is 5.0%, calculate the levels of the factor risk premia that

are consistent with the reported values for the factor betas and the expected returns for

the two stocks.

b. You expect that in one year the prices for Stocks D and E will be $55 and $36, respectively.

Also, neither stock is expected to pay a dividend over the next year. What should

the price of each stock be today to be consistent with the expected return levels listed at

the beginning of the problem?

c. Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly

increases by 0.25% (i.e., from x% to (x + 0.25)%, where x is the value established in Part

a. What are the new expected returns for Stocks D and E?

d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your

opinion about what the stock prices will be in one year, what adjustment will be necessary

in the current (i.e., today's) prices?