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.

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 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)?

Scenario Bust Boom Rate of Return Aggressive Defensive Market Stock A Stock D -9% -10% -7% 43 50 13 Scenario Bust Boom Rate of Return Aggressive Defensive Market Stock A Stock D -9% -10% -7% 43 50 13