Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .04 .097 .102 Normal .72 .114 .133 Boom .24 .156 .148 The market...

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Finance

Consider the following information:

State of
Economy Probability of
State of Economy Rate of Return
if State Occurs
Stock A Stock B
Recession .04 .097 .102
Normal .72 .114 .133
Boom .24 .156 .148

The market risk premium is 7.4 percent, and the risk-free rate is3.1 percent. The beta of Stock A is and the beta of StockB is .
a) 1.25; 1.41
b) 1.47; 1.76
c) 1.21; 1.76
d) 1.25; 1.89
e) 1.47; 1.41

Answer & Explanation Solved by verified expert

3.8 Ratings (748 Votes)

Option A is correct First we will calculate the expected return and then we will use the CAPM equation to find the required beta of both stocks The formula for expected return is See Answer

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State of Economy	Probability of State of Economy	Rate of Return if State Occurs
		Stock A		Stock B
Recession	.04		.097		.102
Normal	.72		.114		.133
Boom	.24		.156		.148

		a) 1.25; 1.41
		b) 1.47; 1.76
		c) 1.21; 1.76
		d) 1.25; 1.89
		e) 1.47; 1.41