Question

Problem 9-9 

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%	4%
25	35	13

Aggressive Stock Market Return 7% Defensive Stock -4% 25 13 a. What are the betas of the two stocks? 

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 25%? 

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 4%.

Answer 1