sider 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 Market Aggressive Stock A Defensive Stock D Bust −8% −10% −6% Boom 32 38 24 Required: Find the beta of each stock.
sider 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 Market Aggressive Stock A Defensive Stock D Bust −8% −10% −6% Boom 32 38 24 Required: Find the beta of each stock.
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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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 | Aggressive Stock A | Defensive Stock D | |
| Bust | −8% | −10% | −6% |
| Boom | 32 | 38 | 24 |
Required:
- Find the beta of each stock.
- If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
- If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
- Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
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