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Suppose you observed the following situation Return if state occurs Sate of Economy Posibility of state of economy Stock A Stock B Bust .10 -.12

Suppose you observed the following situation

Return if state occurs

Sate of Economy Posibility of state of economy Stock A Stock B

Bust .10 -.12 -.05

Nornal .65 .09 .10

Boom .25 .35 .21

A. Calculate the expected return of each stock

B. Assuming the capital asset pricing models holds and stock A's beta is greater than stock B's beta by .25, what is the expected market risk premium?

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