Question: undefined Question 2 [25 marks] a. Consider the following information about Stocks I and II. State of Economy Rate of Return if State of Economy

undefined Question 2 [25 marks] a. Consider the following information about Stocks undefined

Question 2 [25 marks] a. Consider the following information about Stocks I and II. State of Economy Rate of Return if State of Economy Occurs Stocki Stock Il Probability of State of Economy 020 -0.11 -0.14 Recession 0.15 0.14 0.55 Normal 0.30 0.32 0.25 Irrations Exuberance Calculate the expected return on each stock. [6 mark ii. Assuming the capital asset pricing model holds, and Stock B's beta is greater than Stock A's beta what is the expected market risk premium? b. Discuss the statement "the Capital Asset Pricing Model (CAPM) is just an academic exercise a reflect the actual market scenarios". Day 12 Question 2 [25 marks] a. Consider the following information about Stocks I and II. State of Economy Rate of Return if State of Economy Occurs Stocki Stock Il Probability of State of Economy 020 -0.11 -0.14 Recession 0.15 0.14 0.55 Normal 0.30 0.32 0.25 Irrations Exuberance Calculate the expected return on each stock. [6 mark ii. Assuming the capital asset pricing model holds, and Stock B's beta is greater than Stock A's beta what is the expected market risk premium? b. Discuss the statement "the Capital Asset Pricing Model (CAPM) is just an academic exercise a reflect the actual market scenarios". Day 12

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