Consider the following two scenarios for the economy and the expected returns in each scenario for the
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Question:
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 ReturnScenarioMarketAggressive
Stock ADefensive
Stock DBust-5%-9%-3%Boom122110
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 4%, 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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