(Solution Document) Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components...


Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 45%. Portfolios A and B are both well diversified.


Portfolio Beta on M1 Beta on M2 Expected Return (%)

A 1.5 2.0 35

B 1.9 -0.6 13



What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.)


Expected return-beta relationship E(rP) =________% +___________?P1 +______________?P2

 







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