Suppose there are two independent economic factors, M, and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and Bare both well diversified. Portfolio Beta on M, Beta on M2 Expected Return (%) 31 12 A 1.6 2.4 2.5 -0.7 B What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decin places.)
Suppose there are two independent economic factors, M, and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and Bare both well diversified. Portfolio Beta on M, Beta on M2 Expected Return (%) 31 12 A 1.6 2.4 2.5 -0.7 B What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decin places.)
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
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Please help with this question I have attached as a picture below. Would like to see all steps to get to final answer if possible. Thank you.
Nick
Transcribed Image Text:**Exercise 5**
Suppose there are two independent economic factors, \( M_1 \) and \( M_2 \). The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well diversified.
| Portfolio | Beta on \( M_1 \) | Beta on \( M_2 \) | Expected Return (%) |
|-----------|-------------------|-------------------|---------------------|
| A | 1.6 | 2.5 | 31 |
| B | 2.4 | -0.7 | 12 |
**Question:**
What is the expected return–beta relationship in this economy? *(Do not round intermediate calculations. Round your answers to 2 decimal places.)*
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