Consider the following table, which gives a security analyst\'s expected return
ID: 2616792 • Letter: C
Question
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 6% 20 2.0% 32 5.0% 15 a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A Beta D b. what is the expected rate of return on each stock if the market return is equally likely to be 6% or 20%? (Round your answers to 2 decimal places.) Rate of return on A Rate of return on D indic and the market return is equally likely to be 6% or 20%, what are the alphas of the two stocks? (Negative values should be c. If the T bill rate is 7% round intermediate calculations. Round your answers to 2 decimal places.) Alpha A Alpha DExplanation / Answer
a.
Calculation of BETAS
Beta of Aggressive stock=32-2/20-6
=30/14
=2.14
Beta of Defensive stock=15-5/20-6
=10/14
=.71
b.
Calculation of Expected rate of return
Aggressive=.5*32+.5*2
=16+1
=17%
Defensive=.5*5+.5*15
=2.5+7.5
=10%
c.
Calculation of Alphas
Expected return on Market portfolio (RM)=.5*6+.5*20
=3+10
=13%
Aggressive stock
Expected return=Alpha + Beta*RM
17=Alpha+2.14*13
Alpha= -10.82
Defensive Stock
10=Alpha+.71*13
Alpha=.77