Question
(10 points) Suppose that CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability
(10 points) Suppose that CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability of a boom is 75%. Consider the following information about two stocks X and Y:
Stock Xs rate of return is 20% in the boom state, 2% in the bust state.
Stock Ys rate of return is 14% in the boom state, 8% in the bust state.
Stock Xs beta is 1.5 and Stock Ys beta is 1.
Based on this information, what is the market risk premium? Risk-free rate?
2. (10 points) Suppose that CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability of a boom is 75%. Consider the following information about two stocks X and Y: a Stock X's rate of return is 20% in the boom state, 2% in the bust state. Stock Y's rate of return is 14% in the boom state, 8% in the bust state. Stock X's beta is 1.5 and Stock Y's beta is 1. Based on this information, what is the market risk premium? Risk-free rateStep by Step Solution
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Options Futures And Other Derivatives
Authors: John C. Hull
3rd Edition
0131864793, 9780306457555
