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Consider a one factor economy. (1) There are two well-diversified portfolios A and B. Their expected returns are 11% and 9% respectively. Their betas are

Consider a one factor economy.

(1) There are two well-diversified portfolios A and B. Their expected returns are 11% and 9% respectively. Their betas are 1.1 and 0.85, respectively. Both portfolios are fairly priced.

Calculate the risk free rate and the expected return of the factor portfolio. (12 marks)

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