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Stock returns can be explained by two-factor model

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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%

Reference no: EM131388313

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