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 Aggressive Defensive Scenario Market Stock A Stock D bust -6% -12% -4% boom 15 36 10 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.
Aggressive Defensive
Scenario Market Stock A Stock D
bust -6% -12% -4%
boom 15 36 10
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
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
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