The risk premiums for the factors are 7.5 percent, 6.7 percent, and 7.1 percent,
ID: 2729558 • Letter: T
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))
Expected return. (- 2.926 incorrect)
22.66% incorrect
3.154% incorrect
Can i get help with the Expected Return % please?
Suppose stock returns can be explained by the following three-factor model:Explanation / Answer
Your factor F3 value is incorrect.
What I’m getting is:
F3 = 0.70 x 0.20 + (-0.15 x 0.20) + 1.52 x 0.60
= 1.022
Also for F2, I’m getting 0.254
The return of the portfolio is given by:
Ri = RF + 1F1 + 2F2 3F3
Plugging the values in the formula, we get:
Ri = 4.60% + 1.08 x 7.50% + 0.254 x 6.70% - 1.022 x 7.10%
= 4.60% + 8.10% + 1.7018% - 7.2562%
= 7.26%
Therefore, expected return on the portfolio would be 7.26%.
Using your F3:
The return of the stock is given by:
Ri = RF + 1F1 + 2F2 3F3
Plugging the values in the formula, we get:
Ri = 4.60% + 1.08 x 7.50% + 0.25 x 6.70% - 1.06 x 7.10%
= 4.60% + 8.10% + 1.675% - 7.526%
= 6.85%
Therefore, expected return on the portfolio would be 6.85%.
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