Question: 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 information for

Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all are independent. The following table shows the information for two diversified portfolios:

If the risk-free rate is 4 percent, what are the risk premiums for each factor in thismodel?

B, Portfolio A .85 1.15 16% Portfolio B 45 5 12 , E(R)

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