Question

Suppose there are two independent economic factors, M, and M2. The risk-free rate is 6%, and all stocks have independent firm specific components with a standard deviation of 54%. Portfolios A and B are both well diversified Portfolio Beta on My Beta on M2 Expected Return (x) What is the expected return-beta relationship in this economy? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected retum-beta relationship E(IP) 8P1+ BP2

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v 1x ENG 01:37 16-03-2020 24 BR654 X BM fix BN BL BO BP BQ BR BS BT BUBV B WA 632 633 634 THIS IS A TWO FACTOR ECONOMY Portfolio A = 33% = 6% + 1.7(P1) + 2(P2) 27% = 1.7(P1) + 2(P2) eq(1) EXPECTED RETURN-BETA RELATIONSHIP = E(TP) = Rf + beta1(P1) + beta2(P2) Portfolio B = 14% = 6% +1.9(P1) +(-0.8) (P2) 8% = 1.9(P1) +(-0.8) (P2) eq(2) 635 636 637 ELIMINATION METHOD MULTIPLY eq(1) BY 0.8 AND MULTIPLY eq(2) BY 2 638 639 [27% = 1.7(P1) +2(P2)] X 0.8 [8% = 1.9(P1) +(-0.8)(P2)] X2 ----->>> ----->>> LESS 21.6% = 1.36(P1) + 1.6(P2) 16% = 3.8(P1) +(-1.6)(P2) 37.6% = 5.16 (P1) P1 = 7.2868% NOW eq(1): 27% = 1.7(P1) + 1.9(P2) 27% = 1.7(7.2868%) + 2(P2) 27% = 12.3876% + 2(P2) 7.3062% 647 648 P2 649 650 651 652 EXPECTED RETURN-BETA RELATIONSHIP = E(TP) = Rf + beta1(P1) + beta2(P2) = 6% + beta1(7.29%) + beta2(7.31%) 6% RP1 7.29% RP2 7.31% 653 654 655 ... UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bond portfolio ... ►