Problem 12-4 Multifactor Models The risk premiums for the factors are 7.7 percen

Question

Problem 12-4 Multifactor Models

  

  

  

  

The risk premiums for the factors are 7.7 percent, 6.9 percent, and 7.3 percent, respectively. You create a portfolio with 20 percent invested in Stock A , 20 percent invested in Stock B , and the remainder in StockC.

  

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 4.8 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

Expected Return on the Portfolio = 4.8% + 7.7% * 1.12 + 6.9% * 0.27 + 7.3% * 1.04 = 22.88%

1 2 3 Weightage Weighted 1 Weighted 2 Weighted 3   Stock A 2.05 1.05 0.8 20% 0.41 0.21 0.16   Stock B 0.88 1.65 -0.25 20% 0.176 0.33 -0.05   Stock C 0.89 -0.45 1.55 60% 0.534 -0.27 0.93 1.12 0.27 1.04

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