Problem 1. Consider the following table, which gives a security analysts expected return on two stocks...

50.1K

Verified Solution

Question

Finance

Problem 1. Consider the following table, whichgives a security analysts expected return on two stocks for twoparticular market returns:
States
Market Return
Aggressive Stock
Defensive Stock
Bad
Good
5%
25%
-2%
38%
6%
12%
a) What are the betas of the two stocks?
b) What is the expected rate of return on each stock if themarket return is equally likely to be 5% or 25%?
c) If the T-bill rate is 6% and the market return is equallylikely to be 5% or 25%, draw the SML for this economy.
d) Plot the two securities on the SML graph. What are the alphasof each?
Problem 2. Assume that the risk-free rate ofinterest is 6% and the expected rate of return on the market is16%.
a) A share of stock sells for $50 today. It will pay a dividendof $6 per share at the end of the year. Its beta is 1.2. What doinvestors expect the stock to sell for at the end of the year?
b) A stock has an expected rate of return of 4%. What is itsbeta?

Answer & Explanation Solved by verified expert

3.6 Ratings (452 Votes)

You have asked two unrelated questions in the same postFurther your first question has multiple sub parts Hence I haveaddressed all the sub parts of the first question Please post thesecond question separatelya What are the See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member