Suppose you observe the following situation: State of Economy Bust Normal Boom Probability of State .20 .60 .20 Return if State Occurs Stock B -.04 a. Stock A a. Stock B b. Expected market risk premium Stock A -.06 .15 .50 a. Calculate the expected return on each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .47, what is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) .15 .30 % % %
Suppose you observe the following situation: State of Economy Bust Normal Boom Probability of State .20 .60 .20 Return if State Occurs Stock B -.04 a. Stock A a. Stock B b. Expected market risk premium Stock A -.06 .15 .50 a. Calculate the expected return on each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .47, what is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) .15 .30 % % %
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:Suppose you observe the following situation:
State of
Economy
Bust
Normal
Boom
Probability of
State
.20
.60
.20
Return if State Occurs
Stock B
-.04
.15
.30
a. Stock A
a. Stock B
b. Expected market risk premium
Stock A
-.06
.15
.50
a. Calculate the expected return on each stock. (Do not round intermediate
calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
b. Assuming the capital asset pricing model holds and Stock A's beta is greater than
Stock B's beta by .47, what is the expected market risk premium? (Do not round
intermediate calculations and enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)
%
%
%
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