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Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...

Question

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%,...

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 46%. The following are well-diversified portfolios:


Portfolio Beta on F1    Beta on F2 Expected Return
A 2.1 2.4     35%
B 3.0 –0.24      30%


What is the expected return–beta relationship in this economy? (Do not round intermediate calculations. Round your answers to two decimal places. Omit the "%" sign in your response.)


Fill in this equation below

  E(rP) =  % + (βP1 ×  %) + (βP2 ×  %)

Answers

Portfolio A 0.35-0.06 + 2.1A1+ 2.4λ2 Portfolio B 0.30-0.06 3.0λ1-0.24λ2 Solving the above equations Portfolio A - Portfolio B


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