Look again at Tables 11.1 and 11.2. Suppose you thought a boom would occur 20 percent of the time instead of 50 percent. What are the expected returns on Starcents and Jpod in this case? If the risk-free rate is 10 percent, what are the risk premiums?

Tables 11.1

Tables 11.2

Transcribed Image Text:

States of the Economy and Stock Returns State of Economy Recession Boom Probability of State of Economy 50 50 1.00 Security Returns if State Occurs Starcents -20% 70 Jpod 30% 10