Nikul Suppose stock returns can be explained by a two-factor model. The firm-specific risks forall stocks are independent. The following table shows the information for two diversifiedportfolios:ẞ1ẞ2E(R)Portfolio.791.0918%A-.1916Portfolio B 1.39If the risk-free rate is 4 percent, what are the risk premiums for each factor in this model?(Do not round intermediate calculations and enter your answers as a percent roundedto 2 decimal places, e.g., 32.16.)Factor F1Factor F2%%

Part 2:Explanation:Step 1: Calculate the excess returns for each portfolio.For Portfolio A:\[E(R)_A…

Answered: Suppose stock returns can be explained…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose that three stocks (A, B, and C} and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1)A1 + (0.8)A2 E(RB) = (0.7)A1 + (0.6)A2 E(RC) = (0.3)A1 + (0.4)A2 a. If A1 = 4 percent and A2 = 2 percent, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year. b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale. Problems 13 and 14 refer to the data contained in Exhibit 7.23, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). {Note: You may find it…
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