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 40%. Portfolios A and B are

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 40%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.8 2.2 30 B 2.1 -0.5 8 What is the expected return–beta relationship in this economy?

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