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Consider the following two scenarios for the economy and the returns in each scenario for the market portfolio, an aggressive stock A, and a defensive

Consider the following two scenarios for the economy and the 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 10% 12% 3%
Boom 20 30 10

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 percent rounded to 2 decimal places.)

Expected Rate of Return
Market portfolio %
Stock A %
Stock D %
c.

If the T-bill rate is 5%, 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 A
Stock D

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