Question: Suppose returns follow a two factor model, where the first factor is the return on a market index, and the second factor is the return

  1. Suppose returns follow a two factor model, where the first factor is the return on a market index, and the second factor is the return on a T-bond portfolio. Suppose the risk free rate is 0.03, the expected return on the market index is 0.07, and the expected return on the T-bond portfolio is 0.05. Suppose the sensitivity of a stock to the market index is 1.1, and the sensitivity to the T-bond portfolio is -0.4. What is the expected return on the stock?

Please write out the answer on paper. Thank you.

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