Beta and Alpha Assignment | Homework For You
Problem 1. Consider the following table, which gives a security analysts expected return on two stocks for two particular market returns:
| States | Market Return | Aggressive Stock | Defensive Stock |
| Bad
Good |
5%
25% |
-2%
38% |
6%
12% |
a) What are the betas of the two stocks?
b) What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%?
c) If the T-bill rate is 6% and the market return is equally likely to be 5% or 25%, draw the SML for this economy.
d) Plot the two securities on the SML graph. What are the alphas of each?
Problem 2. Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%.
a) A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?
b) A stock has an expected rate of return of 4%. What is its beta? Get Finance homework help today
