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(a) Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on
(a) Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return Aggressive Stock Defensive Stock 10% -3% 6% 30% 38% 14% 1. What are the betas of the two stocks? (2 marks) II. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? (2 marks) III. If the T-bill rate is 6% and the market return is equally likely to be 10% or 30%, figure out the SML equation for this economy. (2 marks) IV. What are the alphas for each? (2 marks) (b) Suppose that the market expected the values for the three macro factors given in column 2 below, but that the actual values turn out as given in column 3. Factor Expected Rate of Change Actual Rate of Change Inflation 6% 5% Industrial production 4% 7% Oil prices 2% 0% Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. (2 marks)
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