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.

	Rate of Return
Scenario		Market				Aggressive Stock A				Defensive Stock D
Bust			8	%			11	%			6	%
Boom			30				40				24

Required: a. Find the beta of each stock.

Beta

Stock A

Stock D b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

Market Portfolio _________%

Stock A _________%

Stock D _________% c. If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks?

Stock A __________%

Stock D __________ % d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

Better Buy Stock D or Stock A?