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Suppose that there are two independent economic factors, F 1 and F 2 . The risk-free rate is 4%, and all stocks have independent firm-specific

Suppose that there are two independent economic factors, F₁ and F₂. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 41%. The following are well-diversified portfolios:

Portfolio	Beta on F₁	Beta on F₂	Expected Return
A	1.7	2.1	31%
B	2.6

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