The risk premiums for the factors are 7.5 percent, 6.7 percent, and 7.1 percent,

Question

  

  

  

The risk premiums for the factors are 7.5 percent, 6.7 percent, and 7.1 percent, respectively. You create a portfolio with 20 percent invested in Stock A , 20 percent invested in Stock B , and the remainder in Stock C.

What is the expression for the return on your portfolio? (Round your answers to 2 decimal places. (e.g., 32.16))

If the risk-free rate is 4.6 percent, what is the expected return on your portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Suppose stock returns can be explained by the following three-factor model:

Explanation / Answer

3.154

(B) AS per CAPM

EXPECTED RETURN = RF + B (RM -RF)

STOCK A = 4.6 + 2.2*7.5

                = 21.1

STOCK B = 4.6 + 2.24*6.7

                = 19.61

STOCK C = 4.6 + -1.06* 7.1

                = - 2.926

calculation for the return on portfolio: Ri = RF + 1F1 + 2F2 3f3 Stock A = 7.5 + 1.95 + .95 - .70                 = 9.7 Stock B = 6.7 + .84 + 1.55 -( -.15)                 = 9.24 Stock c = .87 + (-.41) -1.52                = -1.06 therefore weights are RETURN stock A 9.7 X 20% 1.94 Stock B 9.24 X 20% 1.85 Stock C (1.06)X 60% -0.636

3.154

(B) AS per CAPM

EXPECTED RETURN = RF + B (RM -RF)

STOCK A = 4.6 + 2.2*7.5

                = 21.1

STOCK B = 4.6 + 2.24*6.7

                = 19.61

STOCK C = 4.6 + -1.06* 7.1

                = - 2.926

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