Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%. Suppose the risk-free rate is 4%.

a. Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down. Use the beta to estimate the firms required rate of return on equity. Does the CAPM return equal the expected return?

b. Calculate the beta of a firm that goes up on average by 18% when the market goes down and goes down by 22% when the market goes up. Use the beta to estimate the firms required rate of return on equity. Does the CAPM return equal the expected return?