1.

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.

	Rate of Return
Scenario	Market	Aggressive Stock A	Defensive Stock D
Bust	5%	9%	3%
Boom	12	21	10

a.	Find the beta of each stock.(Round your answers to 2 decimal places.)

	Beta
Stock A
Stock D

b.	If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.(Enter your answers as a percent rounded to 2 decimal places.)

	Expected Rate of Return
Market portfolio	%
Stock A	%
Stock D	%

c.	If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	Expected Rate of Return
Stock A	%
Stock D	%
2.

The Treasury bill rate is 6% and the market risk premium is 7%.

Project	Beta	Internal Rate of Return, %
P		.60			14
Q		0			10
R		1.0			18
S		.10			6
T		.8			20

a.	What are the project costs of capital for new ventures with betas of .35 and 1.45?(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Beta	Cost of capital
.35	%
1.45	%