HelloCan you show how this is done, the second picture is the solution. There is a equation with two unknown variables and i have to solve for that in order to recieve. I have tried to do this myself but i cant get the correct answer. So if you can show me how to solve thisRP_1 =10% and RP_2 = 5% 4.PortfolioBeta on FBeta on F2Expected ReturnA1.52.031%B2.2-0.227%Equation 10.11 applies here:E(r, ) = r+ Bpi [E(rı)-r]+ Br2 [E(r2)-r]We need to find the risk premium (RP) for each of the two factors:RP1= [E(ri) – r;] and RP2= [E(r2)-r;]In order to do so, we solve the following system of two equations with two unknowns:.31 = .06 + (1.5 × RP1) + (2.0 × RP;).27 = .06 + (2.2 x RP1) + [(-0.2) × RP2]The solution to this set of equations isRP1 = 10% and RP;= 5%Thus, the expected return-beta relationship isE(rp) = 6% + (Bp1 × 10%) + (Bp2 x 5%) 4. Suppose that there are two independent economic factors, F, and F2. The risk-free rate is 6%,and all stocks have independent firm-specific components with a standard deviation of 45%.Portfolios A and B are both well-diversified with the following properties:PortfolioBeta on F,Beta on F2Expected ReturnA1.52.031%B2.2-0.227%What is the expected return-beta relationship in this economy?

Let us assume RP1=PRP2=Q expected return =rf+beta on F1×RP1+beta on F2×RP2=rf+beta on F1×P+beta on…

Answered: Portfolio Beta on F, Beta on F2…

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

See similar textbooks

Related questions

Question

Hello

Can you show how this is done, the second picture is the solution. There is a equation with two unknown variables and i have to solve for that in order to recieve. I have tried to do this myself but i cant get the correct answer. So if you can show me how to solve this

RP_1 =10% and RP_2 = 5%

4.
Portfolio
Beta on F
Beta on F2
Expected Return
A
1.5
2.0
31%
B
2.2
-0.2
27%
Equation 10.11 applies here:
E(r, ) = r+ Bpi [E(rı)-r]+ Br2 [E(r2)-r]
We need to find the risk premium (RP) for each of the two factors:
RP1= [E(ri) – r;] and RP2= [E(r2)-r;]
In order to do so, we solve the following system of two equations with two unknowns:
.31 = .06 + (1.5 × RP1) + (2.0 × RP;)
.27 = .06 + (2.2 x RP1) + [(-0.2) × RP2]
The solution to this set of equations is
RP1 = 10% and RP;= 5%
Thus, the expected return-beta relationship is
E(rp) = 6% + (Bp1 × 10%) + (Bp2 x 5%)

4. Suppose that there are two independent economic factors, F, and F2. The risk-free rate is 6%,
and all stocks have independent firm-specific components with a standard deviation of 45%.
Portfolios A and B are both well-diversified with the following properties:
Portfolio
Beta on F,
Beta on F2
Expected Return
A
1.5
2.0
31%
B
2.2
-0.2
27%
What is the expected return-beta relationship in this economy?

Expert Solution

Step 1

Let us assume

$R P_{1} = P R P_{2} = Q$

$\begin{array}{rcl} e x p e c t e d r e t u r n & = & r_{f} + b e t a o n F_{1} \times R P_{1} + b e t a o n F_{2} \times R P_{2} \\ = & r_{f} + b e t a o n F_{1} \times P + b e t a o n F_{2} \times Q \end{array}$

substituting values in expected return formula:

$\begin{array}{rcl} e x p e c t e d r e t u r n o f A & = & r_{f} + b e t a o n F_{1} \times R P_{1} + b e t a o n F_{2} \times R P_{2} \\ 31 % & = & 6 % + 1.5 \times P + 2.0 \times Q \\ 31 % - 6 % & = & 1.5 P + 2 Q \\ 25 % & = & 1.5 P + 2 Q \end{array}$

25%=1.5 P +2 Q................................(1)

Step by step

Solved in 2 steps

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS

Portfolio Beta on F, Beta on F2 Expected Return A 1.5 2.0 31% B 2.2 -0.2 27% Equation 10.11 applies here: E(r, ) = rg+ Bpi [E(rı)-r]+ Br2 [E(r2)-r] We need to find the risk premium (RP) for each of the two factors: RP1 = [E(r1) – r] and RP2= [E(r2) – r]