Question
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
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 |
|
| 5 | % |
|
| 7 | % |
|
| 3 | % |
|
Boom |
|
| 27 |
|
|
| 35 |
|
|
| 19 |
|
|
Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? d. Which stock seems to be a better buy on
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