An economy has two scenarios: boom or bust. The returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D are in this chart.
a. Find the beta of each stock. In what way is stock D defensive? (L01)
b. If each scenario is equally likely, calculate the expected rate of return on the market portfolio and on each stock.
c. If the Treasury bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? (L03)
d. Which stock seems to be a better buy based on your answers to (a) through (c)?