Question: 5. Multifactor Models Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows

5. Multifactor Models Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows the informa- tion for two diversified portfolios: B1 B2 E(R) Portfolio a .85 1.15 16% Portfolio B 1.45 -.25 12 If the risk-free rate is 4 percent, what are the risk premiums for each factor in this model?

5. Multifactor Models Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows the informa- tion for two diversified portfolios: B2 E(R) Portfolio A Portfolio B B .85 1.45 1.15 -.25 16% 12 If the risk-free rate is 4 percent, what are the risk premiums for each factor in this model

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