Exercise CAPM.8.2
Exercise CAPM.8.2
Completion requirements
a. Find the beta of each stock. In what way is stock D defensive?
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
Opened: Tuesday, 29 October 2019, 12:00 AM
Due: Tuesday, 5 November 2019, 12:00 AM
11. Expected Returns.
Consider the following two scenarios for the economy and the returns in each scenario for the market portfolio, an aggressive stock A, and defensive stock D.
|
|
Rate of Return |
||
|
Scenario |
Market |
Aggressive Stock A |
Defensive Stock D |
|
Bust |
-8% |
-10% |
-6% |
|
Boom |
32 |
38 |
24 |
a. Find the beta of each stock. In what way is stock D defensive?
b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?