Dear Expert,

This question is from Investments Twelfth Edition, with ISBN 978-1-260-57115-8, page 326. Chapter 10, Problem Sets 4:

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 45%. Portfolios A and B are both well-diversified with the following properties: Portfolio: A, B; Beta on F1: 1.5, 2.2; Beta on F2: 2.0, -0.2; Expected Return: 31%, 27%.

What is the expected return-beta relationship in this economy?

Looking forward for your help in your earliest convenience.

Best regards,

Yunus

4. Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 45%. Portfolios A and B are both well-diversified with the following properties: What is the expected return-beta relationship in this economy