Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 48%. Portfolios A and B are both well diversified.PortfolioABBeta on M₁1.62.2Beta on M₂2.3-0.6Required:What is the expected return-beta relationship in this economy? (Do not round Intermediate calculations. Round your answers to 2decimal places.)Expected return-beta relationship E(rp) =Expected Return (%)388Answer is complete but not entirely correct.Bp1+5.00%4.4311.26Bp2

The expected return-beta relationship describes how the expected return of an investment depends on…

Answered: Required: What is the expected…

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

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 5%, and all stocks have independent firm-
specific components with a standard deviation of 48%. Portfolios A and B are both well diversified.
Portfolio
A
B
Beta on M₁
1.6
2.2
Beta on M₂
2.3
-0.6
Required:
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) =
Expected Return (%)
38
8
Answer is complete but not entirely correct.
Bp1
+
5.00
%
4.43
11.26
Bp2

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