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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 Return Aggressive Defensive
Scenario Market Stock A Stock DBust -9% -10% -7% Boom 25 28 20
Required:
a. Find the beta of each Stock A and Stock D.
b. If each scenario is equally likely, find the expected rate of return on the Market portfolio and on each Stock A and Stock D.
c. If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks (Stock A and Stock D)?
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
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