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Suppose that there are two independent economic factors, Fi and F2. The risk-free rate is 7%, and all stocks have independent firm- specific components with
Suppose that there are two independent economic factors, Fi and F2. The risk-free rate is 7%, and all stocks have independent firm- specific components with a standard deviation of 47%. Portfolios A and B are both well-diversified with the following properties: Portfolio B Beta on F1 2.2 2.8 Beta on F2 2.5 -0.25 Expected Return 25% 20% What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP, and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) E(rp) = rf + (BP1 * RP1) + (Bp2 * RP2) rf % % RP1 RP2 %
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