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Suppose you observe the following situation: State of Economy Probability of State Return if State Occurs Stock A Stock B Bust .10 .12 .05 Normal
Suppose you observe the following situation: |
State of Economy | Probability of State | Return if State Occurs | |
Stock A | Stock B | ||
Bust | .10 | .12 | .05 |
Normal | .65 | .09 | .10 |
Boom | .25 | .35 | .21 |
Required: |
(a) | Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Expected return | ||
Stock A | % | |
Stock B | % | |
(b) | Assuming the capital asset pricing model holds and stock As beta is greater than stock Bs beta by .25, what is the expected market risk premium? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Market risk premium | % |
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