%3Ctable%20cellpadding%3D%220%22%20cellspacing%3D%220%22%20width%3D%22620%22%20c
ID: 2622571 • Letter: #
Question
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0A%22c1%22%3E%26nbsp%3B%3C%2Fi%3E%3C%2Fsub%3E%3C%2Ftd%3E%0A%3C%2Ftr%3E%0A%3C%2Ftbody%3E%0A%3C%2Ftable%3E%0A%3Cdiv%20class%3D%22qi_container%20c20%22%3E%0A%3Cdiv%20class%3D%22qi_controls%20c19%22%3E%3Ca%20title%3D%22Check%20My%20Work%22%20class%3D%0A%22checkWorkButton%20c17%22%3Echeck%20my%20work%3C%2Fa%3E%3Ca%20title%3D%0A%22Reference%20Information%22%20class%3D%22referenceButton%20c18%22%20href%3D%0A%22http%3A%2F%2Fezto.mhecloud.mcgraw-hill.com%2F%23%22%3Ereferences%3C%2Fa%3E%3C%2Fdiv%3E%0A%3Cdiv%3E%3Cbr%20%2F%3E%3C%2Fdiv%3E%0A%3C%2Fdiv%3E%0AExplanation / Answer
the expected return-beta relationship is given by....
E(r(p) )= r(f) + bita(1, p) [E(r1 )? r(f)] + bita(2, p) [E(r2 )? r(f)]
We need to find the risk premium [rp] for each of the two factors:
r(p1) = [E(r1)-r(f)] and
r(p2) = [E(r2)-r(f)]
To do so, the following system of two equations with to unknowns must be solved :
32 = 6 + 1.5 * (r(p1)) + 2.4 * (r(p2)) ..............(1)
10 = 6 + 2.3 * (r(p1)) + (-0.5) * (r(p2))............(2)
solving this equation we get r(p1) = 3.60 %
r(p2)=8.58 %
now the expected return-beta relationship is:
E(r(p)) = 6% + bita(1, p) * 3.60% + bita(2, p) * 8.55%
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