Problem 12-11 Expected Returns (LO2)

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.

	Rate of Return
Scenario	Market	Aggressive Stock A	Defensive Stock D
Bust	5%	9%	3%
Boom	12	21	10

a.	Find the beta of each stock. (Round your answers to 2 decimal places.)

	Beta
Stock A
Stock D

b.	If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a percent rounded to 2 decimal places.)

	Expected Rate of Return
Market portfolio	%
Stock A	%
Stock D	%

c.	If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	Expected Rate of Return
Stock A	%
Stock D	%

d.

Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

	Stock A
	Stock D