Question
In: Finance
Problem 10-4 Suppose that there are two independent economic factors, F1 and F2. The risk-free rate...
Problem 10-4
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 35%. Portfolios A and B are both well-diversified with the following properties:
| Portfolio | Beta on F1 | Beta on F2 | Expected Return | ||||||||
| A | 1.1 | 1.5 | 25 | % | |||||||
| B | 2.0 | –0.15 | 22 | % | |||||||
What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP1 and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.)
E(rP) = rf +
(βP1 × RP1)
+ (βP2 ×
RP2)
What is the rf %
RP1 %
RP2%
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 7%,...
Suppose that there are two independent economic factors, F1 and
F2. The risk-free rate is 7%, and all stocks have independent
firm-specific components with a standard deviation of 47%.
Portfolios A and B are both well-diversified with the following
properties: Portfolio Beta on F1 Beta on F2 Expected Return A 2.2
2.5 25 % B 2.8 –0.25 20 % What is the expected return-beta
relationship in this economy?
Calculate the risk-free rate, rf, and the factor risk premiums,
RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 9%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 9%, and all stocks have independent firm-specific
components with a standard deviation of 49%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
2.4
2.6
27
%
B
3.0
–0.26
22
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 36%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.2
1.6
26
%
B
2.1
–0.16
23
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 36%. Portfolios A
and B are both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
1.2
1.6
26
%
B
2.1
–0.16
23
%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and...
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...
Suppose that there are two independent economic factors,
F1 and F2. The risk-free
rate is 6%, and all stocks have independent firm-specific
components with a standard deviation of 46%. Portfolios A
and Bare both well-diversified with the following
properties:
Portfolio
Beta on F1
Beta on F2
Expected Return
A
2.1
2.4
35%
B
3.0
–0.24
30%
What is the expected return-beta relationship in this economy?
Calculate the risk-free rate, rf, and the
factor risk premiums, RP1 and
RP2, to complete...
uppose that there are two independent economic factors, F1 and F2. The risk-free rate is 7%,...
uppose that there are two independent economic factors, F1 and
F2. The risk-free rate is 7%, and all stocks have independent
firm-specific components with a standard deviation of 37%.
Portfolios A and B are both well-diversified with the following
properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.3
1.7 27 % B 2.2 –0.17 24 % What is the expected return-beta
relationship in this economy? Calculate the risk-free rate, rf, and
the factor risk premiums, RP1 and...
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and...
Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 4%, and all stocks have independent firm-specific
components with a standard deviation of 49%. Portfolios A
and B are both well diversified.
Portfolio
Beta on M1
Beta on M2
Expected Return (%)
A
1.6
2.4
39
B
2.3
-0.7
9
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship
E(rP) =...
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and...
Suppose there are two independent economic factors,
M1 and M2. The risk-free
rate is 5%, and all stocks have independent firm-specific
components with a standard deviation of 56%. Portfolios A
and B are both well diversified.
Portfolio
Beta on
M1
Beta on
M2
Expected
Return (%)
A
1.7
2.2
35
B
2.1
-0.8
8
What is the expected return–beta relationship in this economy?
(Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Expected return–beta relationship
E(rP) =...
"There are two independent factors in the economy, F1 and F2, and the betas for Portfolio...
"There are two independent factors in the economy, F1 and F2,
and the betas for Portfolio X on these factors are 1 and 2
respectively. For Portfolio Y, the betas on the two factors are 2
and 1 respectively. The expected returns of X and Y are 6.5% and 7%
respectively. If the risk-free rate is 3%, what is the expected
return of Portfolio Z that has beta of 1 on F1 and beta of 1 on
F2?"
Suppose a market governed by two factors, F1 and F2. A well-diversified portfolio A with expected...
Suppose a market governed by two factors, F1 and
F2. A well-diversified portfolio A with expected return
28% has betas 1.4 and 1.8 on F1 and F2
respectively. And another well-diversified portfolio B with
expected return 25% has betas 2.3 and -0.18 on F1 and
F2 respectively. If the risk-free rate is 8%, what
should the expected return of a well-diversified portfolio C with
beta 1.5 and -1 on F1 and F2
respectively?
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