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 Rate of Return Bust: Market: -8% Aggressive Stock A: -10% Defensive Stock D: -6% Boom: Market: 27 Aggresive Stock A: 41 Defensive Stock D: 20 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)?
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 Rate of Return Bust: Market: -8% Aggressive Stock A: -10% Defensive Stock D: -6% Boom: Market: 27 Aggresive Stock A: 41 Defensive Stock D: 20 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)?
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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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 Rate
of Return Bust: Market: -8% Aggressive Stock A:
-10% Defensive Stock D: -6% Boom: Market: 27
Aggresive Stock A: 41 Defensive Stock D: 20
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)?
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