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%

What are the betas of the stocks?

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

What are the alphas of the each stock?

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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