Answer:
12.5%
Explanation:
expected return = 20.70%
risk-free rate of return is 8.40%
beta of on factor 1 = 1.2
risk premium on the factor 1 = 4.00%
beta of on factor 2 = 0.6
risk premium on factor 2 = x (unknown)
To calculate for the risk premium on factor 2, we use this formula
expected return= (beta of on factor 1 × premium on the factor 1) + (beta of on factor 2 × premium on the factor 2) + risk-free rate of return
20.70% = (1.2 × 4%) + (0.6 x) + 8.40%
0.207 = 0.048 + 0.6x + 0.084
0.207 = 0.132 + 0.6x
0.6x = 0.075
x = 0.125
=12.5%
