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 Scenario Market Aggressive Stock A Defensive Stock D Bust –11 % –14 % –9 % Boom 33 41 25
a. Find the beta of each stock. (Round your answers to 2 decimal places.)
b. If each 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.)
c. If the T-bill rate is 5%, 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.)
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Stock D
Stock A