a. Calculate the expected return on each stock.

b. Assuming the capital asset pricing model holds and Stock As beta is greater than Stock Bs beta by .31, what is the expected market risk premium?

13 10,.00 points Suppose you observe the following situation: State of Economy Boom Normal Bust Probability of State 17 72 Return if State Occurs Stock A Stock B -,06 18 ,46 17 .31 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.) Expected return Stock A Stock B b. Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .31, 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.) Market risk premium References eBook &Resources Worksheet Learning Objective: 11-02 Explain theSection: 11.7 The Security Market Line impact of diversification Difficulty: 3 Challenge Learning Objective: 11-04 Discuss the security market line and the risk-return trade-off