why the expected return is just the intercept? why not take other factor into consideration?

Please addd some comments

Assume you are considering forming a common stock portfolio consisting of 25% Stonebrook Corporation (Stone) and 75% Rockway Corporation (Rock). As expressed in the two-factor returns models presented below, both of these stocks’ returns are affected by two common factors: surprises in interest rates and surprises in the unemployment rate.

R_{Stone} = 0.11 + 1.0F_{Int} + 1.2F_{Un} + ε_{Stone} R_{Rock} = 0.13 + 0.8F_{Int} + 3.5F_{Un} + ε_{Rock}

Assume that at the beginning of the year, interest rates were expected to be 5.1% and unemployment was expected to be 6.8%. Further, assume that at the end of the year, interest rates were actually 5.3%, the actual unemployment rate was 7.2%, and there were no company-specific surprises in returns. This information is summarized in Table 1 below:

*Table 1: Expected versus Actual Interest Rates and Unemployment Rates*

*Actual*

*Expected*

*Company-specific returns surprises*

Interest Rate

0.053

0.051

0.0

Unemployment Rate

0.072

0.068

0.0

What is the expected return for Stonebrook?

**A)** 11.0%. **B)** 13.0%. **C)** 13.2%.

**Your answer: A was correct!**

The expected return for Stonebrook is simply the intercept return (a_{i}) of 0.11, or = 11.0%. (Study Session 18, LOS 66.j, k)