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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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