1.Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3% and IR 6%. A stock with a beta of 1 on IP and 0.6 on IR currently is expected to provide a rate of return of 11%. If industrial production actually grows by 4%, while the inflation rate turns out to be 7%, what is your best guess for the rate of return on the stock? (Round your answer to 1 decimal place.)

Rate of return %

2.Assume both portfolios A and B are well diversified, that E(r_A) = 15.8% and E(r_B) = 18.8%. If the economy has only one factor, and _A = 1 while _B = 1.3,What must be the risk-free rate? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Risk-free rate %

3.

Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 40%. Portfolios A and B are both well diversified.

Portfolio	Beta on M1	Beta on M2	Expected Return (%)
A	1.8	2.2	30
B	2.1	-0.5	8

What is the expected returnbeta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected returnbeta relationship E(r_P) = % + _P1 + _P2