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Suppose that there are two independent economic factors, Fi and F2. The risk-free rate is 10%, and all stocks have independent firm- specific components with
Suppose that there are two independent economic factors, Fi and F2. 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 F 1.6 2.5 B eta on F2 2.0 -0.20 Expected Return 30% 25% What is the expected return-beta relationship in this economy? Calculate the risk-free rate, f, and the factor risk premiums, RP, and RP2, to complete the equation below. (Do not round intermediate calculations. Round your answers to two decimal places.) Erp) = rf+(Bp1 * RP1) + (BP2 RP2) RP1 RP2
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