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By careful reflection and analysis, Mr Fabian Factoriensis has developed the fol...
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By careful reflection and analysis, Mr Fabian Factoriensis has developed the following two-factor model:
Ri = a + bi,1F1 + bi,2F2 + i,
where Ri is the return of a company bi,j is the factor loading of company i against factor j, Fj is the factor j, and i is a mean zero idiosyncratic error term.
| Company | Expected return | bi,1 | bi,2 |
|---|---|---|---|
| A | 6,1% | 2,4 | -0,7 |
| B | 10,5% | 2,1 | 1,4 |
| C | 10% | 2,1 | -0,7 |
Compute the value of the constant a in the two-factor model.
Instructions:
- The answer is given using two decimal places.
Should
there be intermediate steps in your calculations, please remember to
keep a large number of decimal places in all intermediate calculations,
as the final answer needs to be exact.