Consider the following table, which gives a security analyst\'s expected return
ID: 2775226 • Letter: C
Question
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns:
What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
What is the expected rate of return on each stock if the market return is equally likely to be 5% or 27%? (Do not round intermediate calculations. Round your answers to 1 decimal place. Omit the "%" sign in your response.)
Market Return Aggressive Stock Defensive Stock 5% –3% 3% 27 34 11
Explanation / Answer
Answer: a. Calculation of the betas of the two stocks:
Beta A=(-3-34)/(5-27)=1.6818
Beta D=(3-11)/(5-27)=0.3636
Answer:b Calculation of the Expected return on the Stock:
E(rA)=(-3+34)/2=15.5%
E(rD)=(3+11)/2=7%