Please answer fast I give you upvote Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 55%. Portfolios A and B are both well diversified.PortfolioABBeta on M11.72.0Beta on M₂2.1-0.8Expected Return (%)3415Required: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) = C% +Bp1 +BP2

The expected return formula is as follows:Expected Return = Riskfree rate + Beta 1 x Risk premium of…

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Expected return-beta relationship E(rp) = % + Bp1 + Bp2

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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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Please answer fast I give you upvote

Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 7%, and all stocks have independent firm-
specific components with a standard deviation of 55%. Portfolios A and B are both well diversified.
Portfolio
A
B
Beta on M1
1.7
2.0
Beta on M₂
2.1
-0.8
Expected Return (%)
34
15
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) = C
% +
Bp1 +
BP2

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