Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 8% 3.5% 5.3% 2 0.5 20 26 10 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock? (Round your answers to 2 decimal places.) c. If the T-bill rate is 8%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 8% 3.5% 5.3% 2 0.5 20 26 10 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock? (Round your answers to 2 decimal places.) c. If the T-bill rate is 8%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
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
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios:
| Scenario | Probability | Market Return | Aggressive Stock | Defensive Stock |
|---|---|---|---|---|
| 1 | 0.5 | 8% | 3.5% | 5.3% |
| 2 | 0.5 | 20 | 26 | 10 |
Required:
a. What are the betas of the two stocks? (Round your answers to 2 decimal places.)
b. What is the expected
c. If the T-bill rate is 8%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Expert Solution
Step 1
Data given:
| Scenario | Probability | Market Return | Aggressive Stock | Defensive Stock |
| 1 | 0.5 | 8% | 3.50% | 5.30% |
| 2 | 0.5 | 20% | 26 | 10 |
Working Note #1
Expected return on market = 0.5*0.08 +0.5*0.20=0.14
Expected return on market = 14.00%
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