1. Going forward, the stock market and Bananaramas stock price have the following probability distribution:

Stock Market Bananarama Stock

Probability Rate of Return Rate of Return

0.2 (4%) (6%)

0.6 8% 10%

0.2 14% 20%

(a) Calculate the expected rate of return for the stock market and for Bananaramas stock. (b) Is Bananaramas stock more volatile or less volatile that the stock market in general? (c) Is the Beta for Bananaramas stock lower or higher that 1.0? (d) Is Bananaramas cost of equity higher or lower that the stock markets average cost of equity? (e) Why?