Question
We have 2 stocks: Aggressive and defensive. We are given 2 possible scenarios and expected returns: Market Return Aggressive Stock Defensive Stock 5% (Bad State)
We have 2 stocks: Aggressive and defensive. We are given 2 possible scenarios and expected returns:
| Market Return | Aggressive Stock | Defensive Stock |
| 5% (Bad State) | -2% | 6% |
| 25% (Good state) | 38% | 12% |
a) 
A = ? and 
B = ?
b) If prob(bad) = prob(good) = 0.5, then E(rA) = ? and E(rB) = ?
c) If rf = 6%, and prob(bad) = prob(good) = 0.5, then draw the SML.
d) Plot the A and D. What are the alphas (
)?
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Options Futures And Other Derivatives
Authors: John C. Hull
7th Edition
0136015867, 9780136015864
