Consider the following information: $$\begin{array} { l c c }
{ \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
& &\begin{array}{ll}\text { Stock A } & \text { Stock B }\end{array}\
\text { Recession } & .04& \begin{array}{ll}.097& \quad \quad .102\end{array} \
\text { Normal} & .72& \begin{array}{ll}.114& \quad \quad .133\end{array} \
\text { Boom } & .24 & \begin{array}{ll}.156 & \quad \quad.148\end{array} \
\end{array}$$
The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A is ________ and the beta of Stock B is ________.
A) 1.25; 1.89
B) 1.47; 1.76
C) 1.21; 1.76
D) 1.47; 1.41
E) 1.25; 1.41

Question

Consider the following information:  $$\begin{array} { l c c } 
 { \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
 &  &\begin{array}{ll}\text {   Stock A } & \text { Stock B }\end{array}\
\text { Recession } & .04& \begin{array}{ll}.097&  \quad  \quad .102\end{array} \
\text {  Normal} & .72& \begin{array}{ll}.114&  \quad  \quad .133\end{array} \
\text { Boom } & .24 & \begin{array}{ll}.156 &  \quad  \quad.148\end{array} \
\end{array}$$
The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A is ________ and the beta of Stock B is ________.
A) 1.25; 1.89
B) 1.47; 1.76
C) 1.21; 1.76
D) 1.47; 1.41
E) 1.25; 1.41

Quizplus · Accepted Answer

The expected return for each stock can be calculated using the probabilities and returns for each state of the economy. Using the CAPM formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium, we can solve for the beta of each stock. After calculations, Stock A has a beta of 1.25 and Stock B has a beta of 1.41.

Consider the Following Information The Market Risk Premium Is 7