Consider the following table, I\'m having problem with part C. Please help. Cons
ID: 2780887 • Letter: C
Question
Consider the following table,
I'm having problem with part C. Please help.
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return 5% 20 Aggressive Stock Defensive Stock 5.3% 35% 26 a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) Beta A 1.88 Beta D 0.39 b. What is the expected rate of return on each stock if the market return is equally likely to be 8% or 20%? (Round your answers to 2 decimal places.) Rate of return on A 14.75 % Rate of return on D 765 % c. If the T-bill rate is 8%, and the market return is equally likely to be 8% or 20%, what are the alphas of the two stocks? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Alpha A Alpha D 7B5% 7.85 %Explanation / Answer
rf+8*betaA-rf*betaA=3.5
rf+20*betaA-rf*betaA=26
So, 12*betaA=22.5
Hence, betaA=22.5/12=1.875
rf+8*betaB-rf*betaB=5.3
rf+20*betaB-rf*betaB=10
So, 12*betaB=4.7
Hence, betaB=4.7/12=0.391
expected market return=0.5*8+0.5*20=14
So, return on A=0.5*3.5+0.5*26=14.75%
So, return on B=0.5*5.3+0.5*10=7.65%
required return on A=8+1.875*(0.5*8+0.5*20-8)=19.25%
required return on B=8+0.391*(0.5*8+0.5*20-8)=10.346%
alpha=expected return-required return
alpha on A=14.75-19.25=-4.50%
alpha on B=7.65-10.346=-2.696%