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Find the expected rate of return on the market portfolio

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Reference no: EM132565773

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 D

Bust                 -8%       -10%          -6%

Boom                  25           30               21

Required:

Question a. Find the beta of each stock. Stock A Stock D

Question b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. Market Portfolio Stock A Stock D

Question c. If the T-bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? Stock A Stock D

Question d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)? Stock A Stock D

Reference no: EM132565773

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