Problem 12-4 Multifactor Models

Suppose stock returns can be explained by the following three-factor model:

R_i = R_F + ₁F₁ + ₂F_{2 3}F₃

Assume there is no firm-specific risk. The information for each stock is presented here:

	1	2	3
Stock A	1.25	.50	.05
Stock B	.80	1.30	.25
Stock C	.74	.12	1.26

The risk premiums for the factors are 6.2 percent, 5.4 percent, and 5.8 percent, respectively. You create a portfolio with 30 percent invested in Stock A , 30 percent invested in Stock B , and the remainder in StockC.

What is the expression for the return on your portfolio? (Round your answers to 2 decimal places. (e.g., 32.16))

	Factor Beta
Factor F1
Factor F2
Factor F3

If the risk-free rate is 3.3 percent, what is the expected return on your portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Expected return

%