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Assume that stock returns can be describeed with a three factor model:
Ri = RF + B1F1 + B2F2 - B3F3

Assuming there is no firm specific risk and the risk premiums are 5.3%, 3.9%, and 4.2% ; use the information below to determine:

B 1 | B 2 | B 3
Stock 1 | 1.45 | .80 | .05
Stock 2 | .73 | 1.25 | -.20

1. If your portfolio has 60% invested in stock 1 and 40% in stock 2, and the risk free rate is 2%, what is the expected return on your portfolio?

 

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