Question: 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?
Beta 1 Beta 2 E(R)
Portfolio 1 0.72 1.02 12%
Portfolio 2 1.62 -0.33 8%