Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market return Aggressive Stock Defensive Stock 7% 4% 2.5% 25 38 16 If the T-bill rate is 3% and the market return is equally likely to be 7% or 25%, what are the alphas of the two stocks?

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter6: Risk And Return
Section: Chapter Questions
Problem 14P
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Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns:

Market return Aggressive Stock Defensive Stock
7% 4% 2.5%
25 38 16

If the T-bill rate is 3% and the market return is equally likely to be 7% or 25%, what are the alphas of the two stocks?

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