Ask Question
13 December, 06:58

Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific components with a standard deviation of 42%. Portfolios A and B are both well-diversified with the following properties:Portfolio Beta on F1 Beta on F2 Expected ReturnA 1.6 2.0 32%B 2.6 - 0.20 29%What is the expected return-beta relationship in this economy?

+4
Answers (1)
  1. 13 December, 07:08
    0
    Rp = 3% + BP1 * 10.42% + BP2 * 6.1%

    Explanation:

    Portfolio A:

    R_p = R_f + Beta1*Factor1 + Beta2*Factor2

    32% = 3% + 1.6*F1 + 2*F2

    Portfolio B

    29% = 3% + 2.6*F1 - 0.2*F2

    Solvig the equatios

    3% = - F1 + 2.2*F2

    F1 = 2.2F2 - 3%

    F1 = 2.2F2 - 0.03

    Substituting

    29% = 3% + 2.6 * (2.2F2 - 0.03) - 0.2F2

    29% = 3% + 5.72F2 - 0.078 - 0.2F2

    5.52F2 = 29% - 3% + 0.078

    5.52F2 = 0.26 + 0.078

    5.52F2 = 0.338

    F2 = 0.338/5.52 = 0.061

    F1 = 2.2F2 - 0.03 = 2.2 (0.061) - 0.03

    = 0.1042

    The return Beta relationship in this economy Rp = 3% + BP1 * 10.42% + BP2 * 6.1%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 3%, and all stocks have independent firm-specific ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers