Suppose you observe the following situation: Probability of State State of Economy Recession Normal Irrational exuberance 0.35 0.40 0.25 Stock A Stock B Rate of Return if State Occurs Stock B Stock A % -0.11 0.10 0.45 a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) Expected Return -0.09 0.10 0.25 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose you observe the following situation:
Probability of
State
0.35
0.40
0.25
State of Economy
Recession
Normal
Irrational exuberance
Stock A
Stock B
Expected Return
Rate of Return if State Occurs
Stock B
%
Stock A
a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.)
-0.11
0.10
0.45
-0.09
0.10
0.25
b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, what is the expected
market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Expected market risk premium
Transcribed Image Text:Suppose you observe the following situation: Probability of State 0.35 0.40 0.25 State of Economy Recession Normal Irrational exuberance Stock A Stock B Expected Return Rate of Return if State Occurs Stock B % Stock A a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) -0.11 0.10 0.45 -0.09 0.10 0.25 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium
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