There Are Two Independent Economic Factors, M1 and M2

Multiple Choice

There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks 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(rP) = 5 + 1.12βP1 + 11.86βP2
B) E(rP) = 5 + 4.96βP1 + 13.26βP2
C) E(rP) = 5 + 3.23βP1 + 8.46βP2
D) E(rP) = 5 + 8.71βP1 + 9.68βP2