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Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 9%, and all stocks have independent firm-specific

Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 9%, and all stocks have independent firm-specific components with a standard deviation of 49%. The following are well-diversified portfolios:

Portfolio	Beta on F₁	Beta on F₂	Expected Return
A	2.4	2.6	27%
B	3.0	0.26	22%

What is the expected returnbeta relationship in this economy?

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