An economy has two scenarios: boom or bust. The returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D are in this chart.

a. Find the beta of each stock. In what way is stock D defensive? (L01)
b. If each scenario is equally likely, calculate the expected rate of return on the market portfolio and on each stock.
c. If the Treasury bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (L03)
d. Which stock seems to be a better buy based on your answers to (a) through (c)?

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Rate of Return Defensive Stock D Market Aggressive Stock A Scenario Bust -8% 32 -10% -6% 24 Boom 38