Assume that stock returns can be explained by a two-factor, Finance Basics

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Assume that stock returns can be explained by a two-factor

Question: Assume that stock returns can be explained by a two-factor model. Company-specific risks for all stocks are independent. The table shows the information for two diversified portfolios. If the risk-free rate is 2.5 percent, what are the risk premiums for each factor in this model?

Beta 1 Beta 2 E(R)

Portfolio 1 0.72 1.02 12%

Portfolio 2 1.62 -0.33 8%

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Finance Basics: Assume that stock returns can be explained by a two-factor

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