a)

Suppose you have predicted the following returns for stocks X and Y in three possible states of nature. What are the expected returns?

b)

A firm with an asset beta of 1.0 has a debt beta of zero when 20% of the capital structure is debt, and is estimated to have a debt of .15 if debt went as high as 50% of the capital structure. What is the equity beta under?

a) Low debt

b) High debt

State Probability X Y Boom 0.3 0.15 0.25 Normal 0.5 0.100.20 Recession 0.2 0.02 0.01