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 -5% -9% -3%

Boom 12 21 10

Required:

a.Find the beta of each stock.

Stock A Beta= _____

Stock D Beta- ______

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

Market Portfolio= Rate of Return ____%

Stock A= Rate of Return ______%

Stock D= Rate of Return ______%

c.If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?

Stock A= Rate of Return ______%

Stock D= Rate of Return ______%

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