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Problem 9-9 Consider the following table, which gives a security analyst’s expected return on two stocks...

Problem 9-9

Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market:

Market Return Aggressive Stock Defensive Stock
5 % –3 % 3 %
27 34 11

a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 5% or 27%? (Do not round intermediate calculations. Round your answers to 1 decimal place.)

e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm’s stock if the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 3%.

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Expert Solution

IN CASE OF HURDLE RATE, IT IS NOT MENTIONED, BETA SHOULD BE TAKEN TILL WHAT DECIMALS, SO I HAVE PRESENTED 2 ANSWERS : WITH 2 DECIMAL AND WITH 4 DECIMAL. THANK YOU

jeff jeffy answered 1 year ago
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