Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Aggressive Stock Defensive Stock Return 6% 22 -3% 35 4% 12 Required: a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.
Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Aggressive Stock Defensive Stock Return 6% 22 -3% 35 4% 12 Required: a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely? e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 1P
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![Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of
return on the market:
Market
Return
6%
22
Aggressive
Stock
-3%
35
Defensive
Stock
4%
12
Required:
a. What are the betas of the two stocks?
b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely?
e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the
defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe671eb87-cbd5-4751-b9ce-57f199d1fe44%2Fa7e989a7-6f46-472c-bf43-7f87c480b9ba%2Fq7vcyum_processed.png&w=3840&q=75)
Transcribed Image Text:Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of
return on the market:
Market
Return
6%
22
Aggressive
Stock
-3%
35
Defensive
Stock
4%
12
Required:
a. What are the betas of the two stocks?
b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely?
e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the
defensive firm's stock if market return is equally likely to be 6% or 22% ? Also, assume a T-Bill rate of 4%.
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