Question
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: |
Market Return | Aggressive Stock | Defensive Stock |
7% | 4% | 4% |
25 | 35 | 13 |
a. | What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
Beta | |
Aggressive Stock | |
Defensive Stock | |
b. | What is the expected rate of return on each stock if the market return is equally likely to be 7% or 25%? (Do not round intermediate calculations. Round your answers to 1 decimal place. Omit the "%" sign in your response.) |
Expected Rate of Return | |
Aggressive Stock | % |
Defensive Stock | % |
e. | What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firms stock if market return is equally likely to be 7% or 25%? Also, assume a T-Bill rate of 4%. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
Hurdle rate | % |
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