Consider the tollowing two scenarios for the economy and the expected returns in
ID: 2790500 • Letter: C
Question
Consider the tollowing two scenarios for the economy and the expected returns in each scenario for the market port olio, an aggressive stock A, and a defensive stock D Rate of Return Aggressive Defensive Scenario Market Stock A Stock D -108 38 32 24 a. Find the beta of each stock. (Round your answers to 2 decimal places.) Answer is complete and Beta Stock! 1.2 Stock! 0.78 b. Ifeach scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. (Enter your answers as a whole percent.) Answer is complete and Expected Rate of Return Market Stock A Stock D c.r the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places) Answer is complete but not Expected correct. Rate of Return Stock D 7.7 d. Which stock seems to be a better buy on the bas's of your answers to (a) through (c)? Stock D Stock AExplanation / Answer
c.
Stock A
Fair expected rate of return=Risk free rate+Beta*(Market return-Risk free rate)
=4%+1.2(12%-4%)
=13.60%
Stock D
Fair expected rate of return=Risk free rate+Beta*(Market return-Risk free rate)
=4%+0.75(12%-4%)
=10.00%