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Compute the expected returns on the stock market


Problem:

The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

State of the Market    Probability that state Occurs    Stock Market    Chicago Gear
Stagnant              0.20    -10%    -15%    9.75%    15.00%
Slow growth         0.35    10%    15%
Average growth    0.30    15%    25%
Rapid growth        0.15    25%    35%

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?

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Finance Basics: Compute the expected returns on the stock market
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