If an investors holds a diversified portfolio which has risk exposures to the market portfolio,...
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If an investors holds a diversified portfolio which has risk exposures to the market portfolio, the size factor portfolio and the value factor portfolio. Betas and the risk premium of the factor portfolios are shown in the table below: Question: Suppose you expect that investors portfolio will earn 20% per year and the risk-free rate is 2% per year. What is the abnormal return (alpha) the investor is expected to earn?
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