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Homework answers / question archive / 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

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

Finance

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. Scenario Bust Boom Rate of Return Aggressive Defensive Market Stock A Stock D -5% -7% -3% 25 33 17 Required: a. Find the beta of each stock. b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c. If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks? d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D 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.) Market portfolio Stock A Stock D Expected Rate of Return 10% (5) % 25%

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1.
=(-7%-33%)/(-5%-25%)=1.33333333333333

2.
=(-3%-17%)/(-5%-25%)=0.666666666666667

3.
=(-5%+25%)/2=10.00%

4.
=(-7%+33%)/2=13.00%

5.
=(-3%+17%)/2=7.00%

6.
=3%+(-7%-33%)/(-5%-25%)*((-5%+25%)/2-3%)=12.3333333333333%

7.
=3%+(-3%-17%)/(-5%-25%)*((-5%+25%)/2-3%)=7.66666666666667%

8.
Aggressive Stock A

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