Question: Question 2 A security analyst's expected return on two stocks for two separate market returns are as follows: Market return 5% 20% Aggressive stock 2%

Question 2 A security analyst's expected return on two stocks for

Question 2 A security analyst's expected return on two stocks for two separate market returns are as follows: Market return 5% 20% Aggressive stock 2% 32% Defensive stock 3.5% 14% (a) What are the betas of the two stocks? (b) What is the expected rate of return on each stock if the market return is equally likely to be 5% and 20%? (c) Assume the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. The rate of return of government T-bill is 5%. (i) What is the expected rate of return on the market portfolio? (ii) What would be the expected rate of return for a stock with beta=0? (iii) Assume an investor is contemplating buying a stock at $50. The stock is expected to pay $4 dividend next year and you expect to sell the stock at $53. Considering a beta equal to -0.6, is the stock overpriced or underpriced

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