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Problem 12-14 Expected Returns (LO2) 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 Bust Boom Aggressive Defensive Stock A 10% Market -7% 19 Stock D 5% 25 15 Pequired: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

Problem 12-14 Expected Returns (LO2) 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 Bust Boom Aggressive Defensive Stock A 10% Market -7% 19 Stock D 5% 25 15 Pequired: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

EBK CFIN
EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 5PROB
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Problem 12-14 Expected Returns (LO2) 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 Stock A 10% Scenario Bust Market 7% 19 Stock D -5% Boom 25 15 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 4%, 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)?
Transcribed Image Text:Problem 12-14 Expected Returns (LO2) 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 Stock A 10% Scenario Bust Market 7% 19 Stock D -5% Boom 25 15 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 4%, 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)?
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