CAPM
Not what you're looking for?
Problem 11. (Section Four) 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 a 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 percent, 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 based on your answers to (a) through (c)?
Purchase this Solution
Solution Summary
Calculates the beta of each stock, the expected rate of return on the market portfolio and on each stock, the fair expected rate of return on the two stocks as per CAPM
Solution Preview
Please see the attached file which contains the answers
Problem 11. (Section Four) 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 a 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 percent, 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 based on your answers to (a) through (c)?
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?
We can use regression to calculate the value of beta.
Beta is the slope of the line with market return on the X axis and the stock return on the Y axis
Stock A
Market (X) Stock A (Y) XY X2
-8 -10 80 64
32 38 1,216 1,024
Total 24 28 1,296 1,088
N= number of observations= 2
summation of X= 24
summation of Y= 28
summation of XY= 1,296
summation of X2= ...
Purchase this Solution
Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.