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%. The following are well-diversified portfolios:
Portfolio Beta on F1 Beta on F2 Expected Return
A 1.8 2.1 32%
B 2.7 –0.21 27%
What is the expected return–beta relationship in this economy?