Question
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)? | ||||
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