Question
Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 5%, and all stocks have independent firm-specific
Suppose that there are two independent economic factors, F1and F2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 35%. Portfolios A and B are both well-diversified with the following properties:
| Portfolio | Beta on F1 | Beta on F2 | Expected Return | ||||||||
| A | 1.1 | 1.5 | 25 | % | |||||||
| B | 2.0 | 0.15 | 22 | % | |||||||
What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below.
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Banking With Integrity The Winners Of The Financial Crisis
Authors: Dr Heiko Spitzeck , Dr Michael Pirson, Dierksme , Dr. Heiko Spitzeck , Prof. Claus Dierksmeier, Dr. Michael Pirson
1st Edition
