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Suppose there are two independent economic factors M 1 and M 2 The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50% Portfolios A and

  1. Suppose there are two independent economic factors, and . The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios and are both well diversified.

 

Portfolio

Beta on 1

Beta on 2

Expected Return (%)

A

1.8

2.1

40

B

2.0

20.5

10

 

What is the expected return–beta relationship in this economy? (LO 7-5)

Jun 17 2020 View more View Less

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