Problem 11-29 SML [LO 4]

Suppose you observe the following situation:

State of Economy	Probability of State	Return if State Occurs
		Stock A	Stock B
Boom	.16	.08	.05
Normal	.71	.13	.14
Bust	.13	.49	.30

a.	Calculate the expected return on each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	Assuming the capital asset pricing model holds and Stock As beta is greater than Stock Bs beta by .26, what is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a. Stock A = %?

a2. Stock B = %?

b. Market Risk Premium = ?