Suppose you observe the following situation:
a. Calculate the expected return on each stock.
b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by .25, what is the expected market risk premium?
|
State of Economy
|
Probability of State
|
Return if State Occurs Stock A
|
Return if State Occurs Stock B
|
|
Bust
|
.10
|
-.12
|
-.05
|
|
Normal
|
.65
|
.09
|
.10
|
|
Boom
|
.25
|
.35
|
.21
|