Question
Consider the following table, which gives a security analysts expected return on two stocks in two particular scenarios for the rate of return on the
Consider the following table, which gives a security analysts expected return on two stocks in two particular scenarios for the rate of return on the market:
Market Return | Aggressive Stock | Defensive Stock | |||
6 | % | 3 | % | 4 | % |
22 | 35 | 12 | |||
a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 6% or 22%? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
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c. 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 the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 4%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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