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   Market   Aggressive Stock A   Defensive Stock D   Bust     -10 %     -13 %     –4 %   Boom     30       38       17         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 4%, 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)?

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
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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   Market   Aggressive
Stock A
  Defensive
Stock D
 
Bust     -10 %     -13 %     –4 %  
Boom     30       38       17    
 

 

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 4%, 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)?

Required A
Required B
Required C
Required D
If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round
intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Expected Rate
of Return
%
%
Stock A
Stock D
Transcribed Image Text:Required A Required B Required C Required D If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Expected Rate of Return % % Stock A Stock D
Required A
Required B
Required C
Required D
Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Better buy
Transcribed Image Text:Required A Required B Required C Required D Which stock seems to be a better buy on the basis of your answers to (a) through (c)? Better buy
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