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Problem 2 [3pts] Suppose portfolios A and B are both well-diversified with the following properties: Portfolio B1 on Fi B2 on F2 Expected return A

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Problem 2 [3pts] Suppose portfolios A and B are both well-diversified with the following properties: Portfolio B1 on Fi B2 on F2 Expected return A 0.7 1 1. 9 .6% B -0.2 0.9 3.4% There are two independent economic factors, Fi and F2. The risk-free rate is 1%. What is the expected return-beta relationship in this economy? (Hint: find risk premium for each factor)

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