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% -7% -3%

Boom 25 33 17

a. Find the beta of each stock. (Round your answers to 2 decimal places.)

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. (Enter your answers as a whole percent.)

Expected Rate of Return

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? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Expected Rate of Return

Stock A ______%

Stock D ______%

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

• Stock D
• Stock A