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
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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
Transcribed Image Text: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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