Problem 12-14 Expected Returns (LO2)

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.

	Rate of Return
Scenario		Market				Aggressive Stock A				Defensive Stock D
Bust			9	%			11	%			6	%
Boom			26				34				18

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 T-bill rate is 3%, 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)?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B
• Required C
• Required D

Find the beta of each stock. (Round your answers to 2 decimal places.)

	Beta
Stock A
Stock D

If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.)

	Expected Rate of Return
Market portfolio		%
Stock A		%
Stock D		%

If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	Expected Rate of Return
Stock A		%
Stock D		%

Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

	Better buy