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Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, ar aggressive stock A, and a
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, ar aggressive stock A, and a defensive stock D. Scenario Bust Boom Required: Rate of Return Market Aggressive Stock A Defensive Stock D -9% 25 -10% 28 -7% 20 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 3%, 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 the basis of your answers to (a) through (c)?
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