Computing expected return

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Reference no: EM1372942

Assume stock returns can be explained through the following three factor model:
Ri = Rf + B1(F1) + B2(F2) - B3(F3)

Assume there is no firm-specific risk. The information for each stock is presented here:

Beta1 (B1) Beta2 (B2) Beta3 (B3)
Stock A 1.45 0.80 0.05
Stock B 0.73 1.25 -0.20

The risk premiums for the factors are 5.3%, 3.9%, and 4.2%, respectively. If you create a portfolio with 60% invested in stock A and the remainder in stock B, and the risk-free rate is 2%, what is the expected return of your portfolio?

Reference no: EM1372942

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