Expected return on portfolio = Rf + B1p[E(r1)-rf]+ B2,p[E(r2)--rf] [where E(r) -Rf = Risk premium (RP)]
Portfolio A = 7 + (1.6*RP1)+ (2.4*RP2)
30 = 7 +1.6 RP 1 +2.4 RP2
30 -7 = 1.6 RP 1 + 2.4RP 2
[23 -2.4 RP2] = 1.6 RP1
OR [23-2.4RP2]/1.6 =RP1 [Equation1 ]
Portfolio B:
11 = 7+ (2.3*RP1)+(-.7*RP2)
11-7 = 2.3RP1 -.7RP2
4 = 2.3RP1 -.7RP2
Putting value of RP1 from equation 1 in to this equation
4 =2.3[23-2.4RP2]/1.6 -.7RP2
4 = 1.4375 [23 -2.4RP2] -.7RP2
4 = 33.0625- 3.45 RP2 -.7RP2
4 = 33.0625 - 4.15 RP2
4.15RP2 = 33.0625-4
4.15RP2 = 29.0625
RP2 = 29.0625 / 4.15
RP2= 7.00301 (rounded to 7.00%)
Putting value of RP2 in equation1
[23-2.4RP2]/1.6 =RP1
[23 - (2.4*7.00301)]/1.6 = RP1
RP1 = [23- 16.80722]/1.6
= 6.192776/1.6
=3.87 %
Expected return -beta relationship E(rP) = 7 + BP1*3.87% + BP2 * 7.00%
I need a help please. Thank you. Suppose there are two independent economic factors, M and...
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