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Consider the following data representing security analyst's estimates of the expected return on tweo stocks, A and D, as well as the market expected retum
Consider the following data representing security analyst's estimates of the expected return on tweo stocks, A and D, as well as the market expected retum in each of the two possible states of the economy State ProbabilityMarket Normal growth Boom 0.5 0.5 5% 25% -2% 38% 6% 12% Suppose that assumptions of the CAPM are satisfied in this economy and that the risk free rate is 6%. o Wlar i hr ceaocdt a ci mare (b) What are the betas for stocks A and D? Eplain and show your calculations. (e) What should be the expected rates of rettirm on each stock according to CAPM? (d) Write down the equation for the Security Market Line (SML) and draw it on a graph. (e) Plt the returns on A and D calculated in (o on the SML graph. What are the alphas for each stock
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