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Suppose a three-factor apm holds and the risk-free rate is

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Suppose a three-factor APM holds and the risk-free rate is 6 percent. You are interested in two particular stocks. A and B. The returns on both stocks are related to factors 1 and 2 as follows.

r = 0.06 + b1 (0.09) - b2 (0.03) + b3 (0.04)

The sensitivity coefficients for the two stocks are given below.

Stock

b1

b2

b2

A

0.70

0.80

0.20

B

0.50

0.04

0.20

Calculate the expected returns on both stocks. Which stock requires a higher return?

Reference no: EM13484387

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