Can someone please tell me why you multiply by 10 in step 3? I dont understand h
ID: 2612823 • Letter: C
Question
Can someone please tell me why you multiply by 10 in step 3? I dont understand how the two formulas are solved based on the solution to this problem.
http://www.chegg.com/homework-help/investments-10th-edition-chapter-10-problem-4ps-solution-9780077861674
4. S uppose that there are two independent economic factors, F1 and F2. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 45%. The following are well-diversified portfolios: Portfolio Beta on F1Beta on F2
beta f1
beta f2
expected return
A
1.5
2
31%
B
2.2
-0.2
27%
beta f1
beta f2
expected return
A
1.5
2
31%
B
2.2
-0.2
27%
Explanation / Answer
The answer of the question is provided below.
If both sides of an equation will be multiplied or divided by same number then the value of the equation does not change.
In the given case, the expert had to cancel out E(R2) to find the value of E(R1).
Therefore, equation (2) was multiplied by 10.