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

Aggressive Defensive

Scenario Market Stock A Stock D

Bust -9% -11% -6%

Boom 26 34 18

Required:

a.Find the beta of each stock. 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)? Stock A Stock D