Question: Consider the following table, which gives a security analysts expected returns on the two stocks for the two particular market returns Market return Aggressive stock

Consider the following table, which gives a security analysts expected returns on the two stocks for the two particular market returns

Market return Aggressive stock Defensive stock
5% -20% 3%
20% 60% 15%
Risk-free rate 5%

a) What are the betas of the stocks?

b) What is the expected return on each stock if the market return is equally likely to be 5% and 20%?

c) What are the alphas of the each stock?

d) What should be cost of capital of all equity financed project by the aggressive firm for a project with the risk characteristics of defensive firms stock?

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