Suppose stock returns can be explained by the following three-factor model: |
R_{i} = R_{F} + β_{1}F_{1} + β_{2}F_{2} − β_{3}F_{3} |
Assume there is no firm-specific risk. The information for each stock is presented here: |
β_{1} | β_{2} | β_{3} | |
Stock A | 1.11 | .43 | .06 |
Stock B | .73 | 1.28 | −.18 |
Stock C | .64 | −.10 | 1.17 |
The risk premiums for the factors are 5.9 percent, 5.6 percent, and 6.3 percent, respectively. You create a portfolio with 20 percent invested in Stock A , 20 percent invested in Stock B , and the remainder in Stock C. |
What is the expression for the return on your portfolio? (Round your answers to 2 decimal places. (e.g., 32.16)) |
Factor Beta | |
Factor F1 | |
Factor F2 | |
Factor F3 | |
If the risk-free rate is 3.4 percent, what is the expected return on your portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
Expected return _______% |
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