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Current risk-free rate of return is 5%. Consider the following table, which gives a security analysts expected returns on the two stocks for the two
Current risk-free rate of return is 5%. Consider the following table, which gives a security analysts expected returns on the two stocks for the two particular market returns:
Market return | Aggressive stock | Defensive stock |
5% | -10% | 4% |
20% | 40% | 15% |
- What are the betas of the stocks?
- What is the expected return on each stock if the market return is equally likely to be 5% and 20%?
- What are the alphas of the each stock?
- What should be cost of capital of all equity financed project by the aggressive firm for a project with the risk characteristics of defensive firms stock?
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