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Suppose there are two independent economic factors m1 and

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 45%. Portfolios A and B are both well diversified.

Portfolio Beta on M₁ Beta on M₂ Expected Return (%)

A 1.5 2.0 35

B 1.9 -0.6 13

What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected return-beta relationship E(r_P) =________% +___________β_P1 +______________β_P2

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Finance Basics: Suppose there are two independent economic factors m1 and

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