Assuming that the risk-free rate is 5.2%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks. Round your answers to one decimal place

For Stock E =   (λ)1 = 2.86% and (λ)2 = 1.4%.

For Stock D =

Explanation:

So, we are given the following parameters or data or information which is going to help in solving this particular Question/problem.

> We have the assumption that the risk free rate = 5.2%.

> And for stock E, the bi1 = 2.1,  bi2 =2.1 and E(Ri)= 14.02%.

> Also, for Stock D, we have that bi1 = 1.0 ,  bi2 = 3.5 and E(Ri)= 12.90 %.

Therefore, we have that for stock E, the levels of the factor risk premia that are consistent with the reported values for the factor betas and expected returns, (λ)1 = 7.9% - (1.44190% × 3.5) = 2.86%.

Also, 16.59% - (λ)2 × 7.35 + (λ)2 × 2.1 = 9.02%.

Therefore, (λ)2 = 1.4%.

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