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Suppose you observe the following situation: State of Probability of Economy State -19 Boom Normal Bust .07 a. Stock A Stock B b. Market risk

Suppose you observe the following situation: 


State of Probability of Economy State -19 Boom Normal Bust .07 a. Stock A Stock B b. Market risk premium Return if State Occurs Stock A %6 % 96 <-.05 -16 52 Stock B 


a. Calculate the expected return on each stock.



b. Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by 23, what is the expected market risk premium? 

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