Suppose that there are two independent economic factors, F1 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 Beta on F1 Expected Return Portfolio A B 1.5 2.2 Beta on F2 2.0 -0.2 31% 27% What is the expected return-beta relationship in this economy?

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