Using the factor portfolios of Example 10.5 , find the equilibrium rate of return on a portfolio with  1  .2 and  2  1.4.

Consider the following regression results for stock X.
rX  2%  1.2 (percentage change in oil prices )

a. If I live in Louisiana, where the local economy is heavily dependent on oil industry profits, does stock X represent a useful asset to hedge my overall economic well-being?

b. What if I live in Massachusetts, where most individuals and firms are energy consumers?

c. If energy consumers are far more numerous than energy producers, will high oil-beta stocks have higher or lower expected rates of return in market equilibrium than low oil-beta stocks?