Multifactor Model. Suppose stock returns can be explained by the following three-factor model: R1 =...
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Multifactor Model. Suppose stock returns can be explained by the following three-factor model: R1 = Rr + 1F1 + 2F2 3F3 Assume there is no firm-specific risk. The information for each stock is presented here: 1 2 3 Stock A 1.55 .80 .05 Stock B .81 1.25 -.20 Stock C .73 -.14 1.24 The risk premiums for the factors are 4.9 percent, 3.8 percent, and 5.3 percent, respectively. If 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 expected return on your portfolio?
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