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. Scenario Market -8% 26 Bust Boom Rate of Return Aggressive Stock A Defensive Stock D -13% 35 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)? Stock A Stock D Complete this question by entering your answers in the tabs below. Beta Required A Required B Find the beta of each stock. Note: Round your answers to 2 decimal places. Required C -6% 19 Required D
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. Scenario Market -8% 26 Bust Boom Rate of Return Aggressive Stock A Defensive Stock D -13% 35 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)? Stock A Stock D Complete this question by entering your answers in the tabs below. Beta Required A Required B Find the beta of each stock. Note: Round your answers to 2 decimal places. Required C -6% 19 Required D
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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
A 12.
Subject:- finance
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.
Scenario Market
-8%
26
Bust
Boom
Required A
Rate of Return
Aggressive Stock A Defensive Stock D
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 abs below.
Stock A
Stock D
-13%
35
Required B
Beta
Required C
Find the beta of each stock.
Note: Round your answers to 2 decimal places.
Required D
-6%
19
Required A
Required B >
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