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Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 6%, and...

Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 50%. Portfolios A and B are both well diversified.

  Portfolio Beta on M1 Beta on M2 Expected Return (%)
A 1.6 2.5 40
B 2.4 -0.7 10

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) =  % +  βP1 +  βP2

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