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Suppose the market portfolio is equally likely to increase by 40% or decrease by 2%. The risk-free interest rate is 6%. Use the beta of
Suppose the market portfolio is equally likely to increase by 40% or decrease by 2%. The risk-free interest rate is 6%.
Use the beta of a firm that goes up on average by 19% when the market goes down and goes down by 3% when the market goes up to estimate the expected return of its stock. How does this compare with the stock's actual expected return?
The beta of the stock is -0.52.
1) The expected return of the stock is ..... %
2) Does the CAPM hold in this place?
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