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In: Finance

Consider the following two scenarios for the economy and the expected returns in each scenario for...

Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D.

Rate of Return
Scenario Market Aggressive
Stock A		 Defensive
Stock D
Bust –6 % –12 % –4 %
Boom 15 36 10


a. Find the beta of each stock. (Round your answers to 2 decimal places.)


b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.)


c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)


d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

  • Stock D

  • Stock A

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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