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Question 16 1. Suppose that there are two independent economic factors, F and Fz. The risk-free rate is 3.3%, and all stocks have independent firm-specific
Question 16 1. Suppose that there are two independent economic factors, F and Fz. The risk-free rate is 3.3%, and all stocks have independent firm-specific components with a standard deviation of 15%. Portfolios A and B are both well-diversified with the following properties: Portfolio B for F1 . 1.2 B 0.8 B for Fz Expected return -0.3 20.1% 0.6 20.9% What is the risk premium of the second factor, i.e., E[F]? A 4% 8% B C 12% D 16%
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