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Suppose that there are two independent economic factors,F 1 andF 2 . The risk-free rate is 7%, and all stocks have independent firm-specific components with

Suppose that there are two independent economic factors,F₁andF₂. The risk-free rate is 7%, and all stocks have independent firm-specific components with a standard deviation of 37%. The following are well-diversified portfolios:

Portfolio	Beta onF₁	Beta onF₂	Expected Return
A	1.3	1.7	27%
B	2.2	-0.17	24%

What is the expected returnbeta relationship in this economy?

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