Suppose KLM Royal Dutch Airlines, has a hypothetical market beta of 1.2 and a T-bond beta of .7 . Suppose the market index risk premium is 6%, while that of the T-bond portfolio (comprising a basket of European government bonds) is 3%. Then the overall risk premium on KLM Airlines stock is the sum of the risk premiums required as compensation for each source of systematic risk. The risk premium attributable to market risk is the stock's exposure to that risk, 1.2, multiplied by the corresponding risk premium, 6%, or 1.26%=7.2%. Similarly, the risk premium attributable to interest rate risk is .73%=2.1%. The total risk premium is 7.2+2.1=9.3%. Therefore, if the risk-free rate is 4%, the expected return on the portfolio should be 4.0% Risk-free rate +7.2 Risk premium for exposure to market risk +2.1 Risk premium for exposure to interest-rate risk 13.3\% Total expected return More concisely, E(r)=4%+1.26%+.73%=13.3% MULTIFACTOR MODELS AND THE CAPM - Exercise Suppose the risk premiums in Example 7.8 were E(rX)ri=4% and E(rTB)rf=2%. What would be the equilibrium expected rate of return on KLM Royal Dutch Airines