Expected Returns. Consider the following two scenarios for the economy, and the returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.

a. Find the beta of each stock. In what way is stock D defensive?

b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

c. If the T-bill rate is 4 percent, what does the CAPM say about the fair expected rate of return on the two stocks?

d. Which stock seems to be a better buy based on your answers to

(a) through (c)?

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Rate of Return Scenario Market Aggressive Stock A Defensive Stock D Bust -8% -10% -6% Boom 32 38 24