Your international Portfolio management team leader is confident that for the investors required return estimation of a two stock portfolio, the most appropriate model is Fama French 3 factor model. Your firms analyst report shows that the expected returns on SMB, HML, and KSE-100 index are 3.25%, 4.5% and 7% respectively. The T-bills currently giving 2% return. (05 Marks)

The relevant regression information about the two stocks ( , for both stock is 0, ignore terms) are given below as follows:

18. A=Rrf+ At+A1(RMt-Rrf) +A2RSMB+A3RHML+At
19. B=Rrf+ Bt+B1(RMt-Rrf) +B2RSMB+B3RHML+Bt

1. Find the required rate of return on each of the two stocks.
2. If a two stocks (A & B) equally weighted portfolio is constructed, what is the maximum return expected based on your analysis in part i, show all the calculations?