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

1-a). Computation of the beta of each stock:-

Beta of stock A = (change in expected return of stock A) / (change in market return)

= (33% - (-7%)) / (25% - (-5%))

= 40% / 30%

= 1.33

Beta of stock D =  (17% - (-3%)) / (25% - (-5%))

= 20% / 30%

= 0.67

b). Computation of the expected return on market portfolio:-

Expected return on market portfolio = (0.5 * 25%) + (0.5 * -5%)

= 12.5% + (-2.5%)

= 10%

Computation of the expected return on stock A:-

Expected return = (0.5 * 33%) + (0.5 * -7%)

= 16.5% + (-3.5%

= 13%

Computation of the expected return on stock D:-

Expected return = (0.5 * 17%) + (0.5 * -3%)

= 8.5% + (-1.5%)

= 7%

c). Computation of the expected rate of return on stock A:-

Expected rate of return on stock A = Risk free rate + Beta * (Expected market return - Risk free rate)

= 3% + 1.33 * (10% - 3%)

= 3% + (1.33 * 7%)

= 3% + 9.33%

= 12.33%

Computation of the expected rate of return on stock D:-

Expected rate of return on stock D = Risk free rate + Beta * (Expected market return - Risk free rate)

= 3% + 0.67 * (10% - 3%)

= 3% + (0.67 * 7%)

= 3% + 4.67%

= 7.67%

d). Stock A is better because expected Return is greater than fair rate of return.