Consider the following two scenarios for the economy and the 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 −5% −7% −3% Boom 27 35 19
a. Find the beta of each stock. (Round your answers to 2 decimal places.) Beta
Stock A
Stock D
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 percent rounded to 2 decimal places.) Expected Rate of Return
Market portfolio %
Stock A %
Stock D %
c. If the T-bill rate is 4%, 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.) Expected Rate of Return
Stock A %
Stock D %