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Fair expected rate of return on the two stocks

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Reference no: EM132531590

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 ReturnScenario Market Aggressive

Stock A Defensive

Stock D Bust -5% -7% -3% Boom 27 35 19

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)?

Reference no: EM132531590

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