Question: Consider the following table, which provides a security analysts estimated returns on two stocks for two possible scenarios of market returns: Market Return Stock 1

Consider the following table, which provides a security analysts estimated returns on two stocks for two possible scenarios of market returns:

Market Return

Stock 1

Stock 2

T-bill

Probability

10%

12%

8%

1%

0.6

0%

2%

3%

1%

0.4
  1. Compute the expected return for each stock and the Market.
  2. Compute the beta for each stock.
  3. Based on the CAPM, compute the fair expected return for each stock.
  4. Compute the CAPM alpha for each stock. Which stock is a better buy?
  5. As a division head at P&G, you are evaluating a new project. Suppose the project has a market beta of 1.75. If the IRR of this project is 10%, would you approve this project?

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