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Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and...

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Finance

Suppose that there are two independent economic factors,F1 and F2. The risk-freerate is 6%, and all stocks have independent firm-specificcomponents with a standard deviation of 46%. Portfolios Aand Bare both well-diversified with the followingproperties:

PortfolioBeta on F1Beta on F2Expected Return
A2.12.435%
B3.0–0.2430%

What is the expected return-beta relationship in this economy?Calculate the risk-free rate, rf, and thefactor risk premiums, RP1 andRP2, to complete the equation below.(Do not round intermediate calculations. Round your answersto two decimal places.)

E(rP) = rf +(?P1 Ă— RP1)+ (?P2 Ă—RP2)

rf =?%
RP1 = ?%
RP2 = ?%

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Transcribed Image Text

Suppose that there are two independent economic factors,F1 and F2. The risk-freerate is 6%, and all stocks have independent firm-specificcomponents with a standard deviation of 46%. Portfolios Aand Bare both well-diversified with the followingproperties:PortfolioBeta on F1Beta on F2Expected ReturnA2.12.435%B3.0–0.2430%What is the expected return-beta relationship in this economy?Calculate the risk-free rate, rf, and thefactor risk premiums, RP1 andRP2, to complete the equation below.(Do not round intermediate calculations. Round your answersto two decimal places.)E(rP) = rf +(?P1 × RP1)+ (?P2 ×RP2)rf =?%RP1 = ?%RP2 = ?%

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