Question: Multifactor Models Suppose stock returns can be explained by the following threefactor model: R i 5 R F 1 b 1 F 1 1 b

Multifactor Models Suppose stock returns can be explained by the following threefactor model:

R i 5 R F 1 b 1 F 1 1 b 2 F 2 2 b 3 F 3 Assume there is no firm-specific risk. The information for each stock is presented here:

b1 b2 b3 Stock A 1.55 .80 .05 Stock B .81 1.25 −.20 Stock C .73 −.14 1.24 The risk premiums for the factors are 6.1 percent, 5.3 percent, and 5.7 percent, respectively. If 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? If the risk-free rate is 3.2 percent, what is the expected return on your portfolio?

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