You want to use a two-factor return model to calculate the alpha that an investment manager generated. The portfolio has a market beta of 1.5 and a GDP growth rate beta of 1.2. The market risk premium is 6.1% per year and the GDP growth rate risk premium is 1.8% per year. The risk-free interest rate is 3.2% per year. What is the stock's annual expected return estimated by the model?
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The total risk premium for the stock is the sum of the market risk premium and the GDP growth rate risk premium. Total risk premium = Market risk premium + GDP growth rate risk premium Total risk premium = 6.1% + 1.8% Total risk premium = 7.9% Show more…
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