Suppose the market portfolio is equally likely to increase by 40% or decrease by 2%. Also suppose that the risk-free interest rate is 6%.(a. Use the beta of a firm that goes up on average by. 60% when the market goes up and goes down by 5% when the market goes down to estimate the expected return of its stock. How does this compare with the stock's actual expected return? (b. Use the beta of a firm that goes up on average by 17% when the market goes down and goes down by 12% when the market goes up to estimate the expected return of its stock. How does this compare with the stock's actual expected return?

a) Use the beta of a firm that goes up on average by 60% when the market goes up and goes down by 5% when the market goes down to estimate the expected return of its stock. How does this compare with the stock's actual expected return?

1.The beta of the stock is:

2. The expected return of the market is:

3. According to the CAPM, the expected return of the stock should be:

4. Does the CAPM hold in this case?

b) Use the beta of a firm that goes up on average by 17%. when the market goes down and goes down by 12% when the market goes up to estimate the expected return of its stock. How does this compare with the stock's actual expected return?

5. The beta of the stock is negative:

6.The expected return of the stock is:

7.Does the CAPM hold in this case?: