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Free_Kalibri [48]
3 years ago
10

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-sp

ecific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9
Mathematics
1 answer:
OLEGan [10]3 years ago
3 0

Answer:

<em> E(rP) = 4% + 5.50% x β(M1) + 10.92% x β(M2)</em>

Step-by-step explanation:

l<em>et us recall from the following statement:</em>

<em>The  two independent economic factors are M1 and M2</em>

<em>Th risk free rate = 4%</em>

<em> The standard deviation of all stocks of  independent firm specific components is =49%</em>

<em>P = portfolios for A and B</em>

<em>Now, </em>

<em>What is the expected relationship of return-beta </em>

<em>The Expected return-beta relationship E(rP) =  % +  βp₁ +  βp₂</em>

<em>E(rA) = 4% + 1.6 * M1 + 2.4* M2 = 39% </em>

<em> E(rB) = 4% + 2.3 * M1 + (-0.7)* M2 = 9% </em>

<em> Therefore </em>

<em>Solving for M1 and M2 using excel solver, we have M1 = 5.50% and M2 = 10.92% </em>

<em> E(rP) = 4% + 5.50% x β(M1) + 10.92% x β(M2)</em>

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