Assume that Stock I is related to two factors where the sensitivity coefficients, $_i1 and $_i2 are 1.4 and 0.8, respectively. If the risk-free rate is 8%, the premium for the first factor is 6% and the second factor premium is -2%, what is the stock's expected return? A) 14.8% B) 8.7% C) 10.3% D) 15.1% E) 1.6%

Question

Quizplus · Accepted Answer

The expected return is calculated as the risk-free rate plus the sum of the products of each factor's sensitivity coefficient and its premium: 8% + (1.4 * 6%) + (0.8 * -2%) = 14.8%.

Assume That Stock I Is Related to Two Factors Where