Question
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 52%. Portfolios A and B are both well diversified.
Portfolio Beta on M1 Beta on M2 Exp.Return (%)
A 1.6 2.5 31
B. 2.4. -0.7. 12
What is the expected return-beta relationship in this economy?
Expected return-beta relationship E(rP) =
5.00% + ........ P1 + ........P2
The answer is not 5.01 and 7.19
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
15th edition
1337671002, 978-1337395250
