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a) Assume that the risk-free rate of interest is 4% and the expected rate of return...

a) Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 14%. A share of stock sells for £68 today. It will pay a dividend of £3 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

b) Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%. The following are well-diversified portfolios:

Portfolio

Beta on F1

Beta on F2

Expected Return

A

1.7

2.2

33%

B

2.7

-0.22

30%

What is the risk premium for each of the two factors?

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