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(rP) =________% +___________?P1 +______________?P2
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