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?
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