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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.
| Scenario | Rate of Return | ||
|---|---|---|---|
| Market | Aggressive Stock A | Defensive Stock D | |
| Bust | 11% | 14% | 9% |
| Boom | 33 | 41 | 25 |
Required:
- Find the beta of each stock.
- If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
- If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?
- Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
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Advanced Finance
Authors: Michael Fardon
1st Edition
1872962319, 1872962173, 978-1872962313, 978-1872962177
