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State of Economy Probability of State of Economy Return if State Occurs Stock A Stock B Bust 0.25 -0.8 -.05 Normal 0.60 0.13 0.14 Boom

State of Economy Probability of State of Economy Return if State Occurs

Stock A Stock B

Bust 0.25 -0.8 -.05

Normal 0.60 0.13 0.14

Boom 0.15 0.48 0.29.

(a). Calculate the expected return on each stock

(b) Assume the capital asset pricing model holds and Stock A's beta is greater than stock B's beta by 0.25, what is the expected market risk premium?

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