Consider the two scenarios. A capital market analyst gives the expected return on stocks A and B under a mild boom market return of 5% and a strong boom market return of 20%. Scenario 1: Market Return =5%, Stock A return =2%, Stock B return =3.5% Scenario 2: Market Return =20%, Stock A return =32%, Stock B return =14% Questions: a. What are the betas of stocks A and B ? b. What is the expected rate of return on each stock if the market return is 50% in scenario 1 and 50% in scenario 2 ? The risk-free rate is 8%. c. Draw the SML for question b. d. Then Plot the two stocks on the SML graph at question c. We define alpha as the actual expected return minus the required return given risk. What are the alphas of each? e. What hurdle rate do you think can be used by the management board of stock A to discount a risky project like investing in Stock B Consider the two scenarios. A capital market analyst gives the expected return on stocks A and B under a mild boom market return of 5% and a strong boom market return of 20%. Scenario 1: Market Return =5%, Stock A return =2%, Stock B return =3.5% Scenario 2: Market Return =20%, Stock A return =32%, Stock B return =14% Questions: a. What are the betas of stocks A and B ? b. What is the expected rate of return on each stock if the market return is 50% in scenario 1 and 50% in scenario 2 ? The risk-free rate is 8%. c. Draw the SML for question b. d. Then Plot the two stocks on the SML graph at question c. We define alpha as the actual expected return minus the required return given risk. What are the alphas of each? e. What hurdle rate do you think can be used by the management board of stock A to discount a risky project like investing in Stock B