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0. Expected Return An economy has two scenarios: boom or bust. The returns in each scenario for the market portfolio an aggressive stock A and
0. Expected Return An economy has two scenarios: boom or bust. The returns in each scenario for the market portfolio an aggressive stock A and a defensive stock D are: Rate of Return Scenario Market Aggressive Stock A Defensive Stock D Bust -896 -10% -3% Boom 32% 38% 24% a. Find the betas of each stock (use the definition of beta). In what way is stock D defensive? b. If each scenario is equally likely, find the expected rate of return on the market portolio and on each stock. c. If the Treasury bill rate is 4%, 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? a
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