The probability that the economy will experience a recession next year is 0.3 while the probabilities of moderate growth or rapid expansion are 0.5 and 0.2 respectively. The common stock of firm A is expected to return 5%,15% or 20% depending on whether the economy experiences a recession, moderate growth or rapid expansion, respectively. The returns for firm B are expected to be 0%, 16%, or 30% respectively.

a. calculate the expected rate or return for each firm's common stock.

b. what is the variance of the return for firm A and B common stock?

c. What is the standard deviation of the rate of return for firm A and B common stock?

d. According to the CAPM, the expected return on a risky asset depend on three components. Describe each component and explain its role in determining expected return.

Answer rating: 100% (QA)

Given that The probability that the economy will experience recession 03 moderate 05 expansion ... View the full answer