Question
Expected Returns.Consider the following two scenarios for the economy and the returns in each scenario for the market portfolio, an aggressive stock A, and a
Expected Returns.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. (LO2)
Rate of Return
Scen; Market; Aggressive; Defens
Stock A ; Stock D
Bust -8% ; -10% ; -6%
Boom 32 ; 38 ; 24
a. Find the beta of each stock. In what way is stock D defensive?
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
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