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 returnbeta relationship in this economy?

Expected returnbeta relationship E(rP) =

5.00 % + ........ P1 + ........P2

*The answers are not 5.014 and 7.191