Suppose that there are two independent economic factors, F1 and F. The risk-free rate is 10%, and all stocks have independent firm- specific components with a standard deviation of 40%. Portfolios A and B are both well-diversified with the following properties: Portfolio Beta on F1 A 1.6 B 2.5 rf RP RP2 Beta on F2 Expected Return 2.0 -0.20 Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, rf, and the factor risk premiums, RP and RP2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(IP) = If + (Bp1 RP1) + (Bp2 * RP2) % % % 30% 25%

Suppose that there are two independent economic factors, r1 and r2. The risk-free rate is 10%, and all stocks have independent firmspecific components with a standard deviation of 40%. Portfolios A and B are both well-diversifled with the following properties: Required: What is the expected return-beta relationship in this economy? Calculate the risk-free rate, r8 and the factor risk premiums, RP1 and P2 to complete the equation below. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. E(rp)=rt+(p11)+(p2Rp2)