Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%, the risk premium on the first-factor portfolio is 4%, and the risk premium on the second-factor portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor, what is its expected return?
A. 7.0%
B. 8.0%
C. 18.2%
D. 13.0%
E. 13.2%
C. 18.2%
0.05 + 0.6 (0.04) + 1.8 (0.06) = 0.182.
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