Answer:
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%.
