Question

Suppose stock returns can be explained by the following three-factor model:    Ri = RF +...

Suppose stock returns can be explained by the following three-factor model:

  

Ri = RF + β1F1 + β2F2 − β3F3

  

Assume there is no firm-specific risk. The information for each stock is presented here:

  

β1 β2 β3
  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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