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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

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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

Aggressive Defensive

Scenario  Market  Stock A Stock D

Bust   -5%   -9%   -3%

Boom   12    21    10  

Required:

a. Find the beta of each stock.

Stock A Beta= _____

Stock D Beta- ______

b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

Market Portfolio= Rate of Return ____%

Stock A= Rate of Return ______%

Stock D= Rate of Return ______%

c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?

Stock A= Rate of Return ______%

Stock D= Rate of Return ______%

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