Question

Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market:

Market Return		Aggressive Stock		Defensive Stock
7	%	–4	%	7	%
21		38		10

a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 7% or 21%? (Do not round intermediate calculations. Round your answers to 1 decimal place.)

e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm’s stock if the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 7%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

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