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There Are Two Independent Economic Factors M1 and M2

Question 11

Multiple Choice

There are two independent economic factors M1 and M2. The risk-free rate is 5% and all shares have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model? There are two independent economic factors M1 and M2. The risk-free rate is 5% and all shares have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model? A) E(r<sub>P</sub>) = 5 + 1.12?<sub>P1</sub> + 11.86?<sub>P2</sub> B) E(r<sub>P</sub>) = 5 + 4.96?<sub>P1</sub> + 13.26?<sub>P2</sub> C) E(r<sub>P</sub>) = 5 + 3.23?<sub>P1</sub> + 8.46?<sub>P2</sub> D) E(r<sub>P</sub>) = 5 + 8.71?<sub>P1</sub> + 9.68?<sub>P2</sub>


A) E(rP) = 5 + 1.12?P1 + 11.86?P2
B) E(rP) = 5 + 4.96?P1 + 13.26?P2
C) E(rP) = 5 + 3.23?P1 + 8.46?P2
D) E(rP) = 5 + 8.71?P1 + 9.68?P2

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