Suppose you observe the following situation: State...
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Finance
| Suppose you observe the following situation: |
| State of Economy | Probability of State | Return if State Occurs | |
| Stock A | Stock B | ||
| Boom | .16 | .05 | .07 |
| Normal | .71 | .16 | .17 |
| Bust | .13 | .49 | .30 |
| a. | Calculate the expected return on each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | Assuming the capital asset pricing model holds and Stock As beta is greater than Stock Bs beta by .26, what is the expected market risk premium? |
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