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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%

  1. What are the betas of the stocks?
  2. What is the expected return on each stock if the market return is equally likely to be 5% and 20%?
  3. What are the alphas of the each stock?
  4. 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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