Consider the following two scenarios for the economy and the expected returns in each scenario for the
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Question:
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A and a defensive stock D
Scenario Rate of Return
Market Aggressive Stock A Defensive Stock D
Bust
Boom
Required:
a Find the beta of each stock.
b If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
c If the Tbill rate is what does the CAPM say about the fair expected rate of return on the two stocks?
d Which stock seems to be a better buy on the basis of your answers to a through c
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