We know the following expected returns for stock A and the market portfolio, given different states of the economy: State (s) Probability E(rA,s) E(rM,s) Recession 0.3 -0.05 0.02 Normal 0.5 0.1 0.05 Expansion 0.2 0.18 0.09 The risk-free rate is 0.02. Assuming the CAPM holds (expected and required returns are the same) , what is the beta for stock A?

You've estimated the following expected returns for a stock, depending on the strength of the economy: State (s) Probability Expected return Recession 0.1 -0.05 Normal 0.5 0.06 Expansion 0.4 0.11 What is the expected return for the stock? What is the standard deviation of returns for the stock?

You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities?  State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21

Suppose you have predicted the following returns for stock C in three possible states of nature. What is the expected return of stock C?   State         Probability           Return   Boom            0.3                   0.15     Normal         0.5                   0.10    Recession      0.2                   0.02

Assuming that the CAPM approach is appropriate, compute the required rate of return for each of the following stocks, given a risk-free rate of 0.07 and an expected return for the market portfolio of 0.13:   Stock A B C D E Stock Beta 1.3 0.9 0.8 1 1.4

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.30 0.05-0.15 Normal 0.55 0.15 0.15 Boom 0.15 0.20 0.35 Calculate the expected return for the two stocks.

*Stock A has a beta of 1.3 and an expected return of 10.2. Stock B has a beta of 0.8 and an expected return of 8.7. If these stocks are priced correctly according to the CAPM, what is the risk-free rate? Give your answer in percentage to the nearest basis point.

Consider the following information about Stocks X and Y: State of Economy Probability of State Stock X Returns Stock Y Returns Recession 0.15      0.11    -0.25 Steady 0.55    0.18 0.11 Boom 0.30    0.08       0.31 The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?   a. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.     b. If both expected inflation and the market risk premium (rM – rRF) increase, the required returns of both stocks will increase by the same amount.     c. Since the market is in equilibrium, the required returns of the two stocks should be the same.     d. If expected inflation remains constant but the market risk premium (rM – rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase.     e. If both expected inflation and the market risk premium (rM – rRF) increase, the required return on Stock HB will increase by…

Consider the following information about Stocks I and II: Probability of State of Economy State of Rate of Return if State Occurs Economy Stock I Stock II Recession 0.15 0.20 -0.25 Normal 0.70 0.21 0.09 Irrational exuberance 0.15 0.06 0.44 The market risk premium is 7 percent, and the risk-free rate is 4 percent. a) Which stock has the most systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain.