Suppose that two factors have been identified for the U.S. economy: the market return (MKT) and...

 

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Suppose that two factors have been identified for the U.S. economy: the market return (MKT) and the interest rate (IR). MKT is expected to be 7%, and IR 3%. The risk-free rate is 2%. a. [1pt] What are the risk premia of market and interest rate factors? b. [1pt] What is expected return of a stock with a beta of 1.2 on MKT and 0.3 on IR? c. [2pts] If market return actually increases 1%, while the interest rate turns out to be 4%, does the expected rate of return on the stock increase or decrease and by how much? Suppose that two factors have been identified for the U.S. economy: the market return (MKT) and the interest rate (IR). MKT is expected to be 7%, and IR 3%. The risk-free rate is 2%. a. [1pt] What are the risk premia of market and interest rate factors? b. [1pt] What is expected return of a stock with a beta of 1.2 on MKT and 0.3 on IR? c. [2pts] If market return actually increases 1%, while the interest rate turns out to be 4%, does the expected rate of return on the stock increase or decrease and by how much?