Problem 3: CAPM (8 points) Stocks A and B have the returns as below: State of the world Probability Stock A return Expansion 0.7 15% Recession 0.3 -5% Stock B return 25% -20% a) (2 points) What is the expected return on stock A? b) (2 points) What is the expected return on stock B? c) (2 points) If CAPM holds and stock B beta is 0.25 larger than stock A beta (that is, BB BA+ 0.25), what is the expected market risk premium (RM Rp)? d) (2 points) Stocks C and D are traded in a different market than stocks A and B. Thus, that market might have different expected market return and risk-free rate than then market where the stocks A and B are traded. Assume that CAPM holds in the market where stocks C and D are traded. Stock C has expected return two times higher than stock D (that is, Kc = 2p) and stock C also has beta two times higher than stock D (that is, Bc = 2BD). What is the risk-free rate in the market where stocks C and D are traded