"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?"

Expert Solution

jeff jeffy answered 2 years ago

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...

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 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...

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 5%,...

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...

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 3%,...

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 Beta on F2 Expected Return A 1.4 1.8 30% B 2.4 –0.18 27% 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...

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?

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,...

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"There are two independent factors in the economy, F1 and F2, and the betas for Portfolio...

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