Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust 9% 11% 6% Boom 26 34 18 Required:

1: Find the beta of each stock.

2: If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

3: If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks?

4: Which stock seems to be a better buy on the basis of your answers to (a) through (c)?