Working with a two-factor APT model an investor has found two risk factors, X and Y....

Transcribed Image Text:

Working with a two-factor APT model an investor has found two risk factors, X and Y. The investor is looking at two stocks, A and B. The expected return on stock A is 12% and that of stock B 10%. The beta (factor sensitivity) of stock A with respect to X is 1 and with respect to Y it is 1/2. The beta of stock B with respect to X is 0 and with respect to Y it is 2. The risk free rate is 4%. What are the risk premia of factors X and Y? Working with a two-factor APT model an investor has found two risk factors, X and Y. The investor is looking at two stocks, A and B. The expected return on stock A is 12% and that of stock B 10%. The beta (factor sensitivity) of stock A with respect to X is 1 and with respect to Y it is 1/2. The beta of stock B with respect to X is 0 and with respect to Y it is 2. The risk free rate is 4%. What are the risk premia of factors X and Y?

Answer rating: 100% (QA)

To calculate the risk premia of factors X and Y in the twofactor APT model we need to use the formul... View the full answer