(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 rate