Assume that stock returns can be explained by a two-factor model. Company-specific risks for all stocks are independent. The table shows the information for two diversified portfolios. If the risk-free rate is 2.5 percent, what are the risk premiums for each factor in this model? Please explain how you got the answer.
|
Beta 1
|
Beta 2
|
E(R)
|
|
Portfolio 1
|
0.72
|
1.02
|
12%
|
|
Portfolio 2
|
1.62
|
-0.33
|
8%
|