a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock coome to be a better buy on the basis of your answere to (a) through lel?
a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock coome to be a better buy on the basis of your answere to (a) through lel?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
p
Transcribed Image Text:Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an
aggressive stock A, and a defensive stock D.
Rate of Return
Scenario
Bust
Boom
Market
-6%
15
Aggressive Stock A Defensive Stock D
-12%
36
-4%
10
Required:
a. Find the beta of each stock.
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Complete this question by entering your answers in the tabs below.
Required A
Required B Required C
Required D
If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
Note: Enter your answers as a whole percent.
Expected Rate
of Return
Market portfolio
Stock A
4
%
6
%
Stock D
4
%
< Required A
Required C >
Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required A
Required B Required C
Required D
If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks?
Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.
Expected Rate
of Return
Stock A
3.12 %
Stock D
3.62
%
< Required B
Required D >
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