Assume there are two independent factors, F1 and F2. The risk-free rate is 6%, and all stocks returns

have independent firm-specific random components with a standard deviation of 20%. Portfolios A and

B are both well diversified. The expected return on Portfolio A is 36%, its beta on Factor F1 is 1.5 and

its beta on Factor F2 is 2. The expected return on Portfolio B is 21%, its beta on Factor F1 is 1 and its

beta on Factor F2 is 1.5

Which equation below provides the correct pricing model? Please show working.

11 Assume there are two independent factors, Fl and F2. The risk-free rate is 6%, and all stocks returns have independent firm-specific random components with a standard deviation of 20%. Portfolios A and B are both well diversified. The expected return on Portfolio A is 36%, its beta on Factor F1 is 1.5 and its beta on Factor F2 is 2. The expected return on Portfolio B is 21%, its beta on Factor F1 is 1 and its beta on Factor F2 is 1.5. Which equation below provides the correct pricing model? Your choice: 11/13 Qs E() = 6% + 8.71%B1 +9.68%B2 E() = 6% + 60%B1-30%B2 E(1) = 6%-30%B1 +60%B2 E(n) = 6% +9.68%B1 +8.71%B2 ED) = 6% - 30%B1 +55%B2