Question

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 ×  %)

Answer 1

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 0.35-0.06 + 2.1A1+ 2.4λ2 -0.30--( 0.06 3.0A1-0.24 2) 0.05-0-0.9A1+ 0.9λ1-2.64λ2-0.05 Put λ1 in portfolio equation 0.35-0.06 + 2.1 х (2.64λ2-0.05 ) / 0.9 + 2.4λ2 0.29 = 2.33333 x (2.64λ2-0.05 ) + 2.4 2 0.29-6.1599999999λ2-0.116666666 + 2.4λ2 0.406666666 8.5599999999λ2 2 0.406666666 / 8.5599999999 λ2_ 0.04750778808 N2= 475% Put λ2 value in portfolio B equation 0.30 = 0.06 + 3.0A1-0.24 x (0.04750778808) 0.24-3.0λ1-0.01140186913 0.25140186913 3.0М A1 - 0.25140186913 3.0 0.08380062304 A1-8.38% Expected return-beta relationship E(rP) 6% βΡ1x 8.38% ßP2 x (4.75%)