Discuss the below:
Q: (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
a. Calculate the expected returns on the stock market and on Chicago Gear stock.
b. What is Chicago Gear's beta?
c. What is Chicago Gear's required return according to the CAPM?
State of Economy Probability Stock Market Chicago Gear
Stagnant 0.2 -9% -16%
Slow 0.35 10% 15%
Average 0.3 14% 25%
Rapid 0.15 25% 35%