Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified.   Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9   Required: What is the expected return–beta relationship in this economy?

Essentials Of Investments
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Chapter1: Investments: Background And Issues
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Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified.
 

Portfolio Beta on M1 Beta on M2 Expected Return (%)
A 1.6 2.4 39
B 2.3 -0.7 9

 

Required:

What is the expected return–beta relationship in this economy?

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