Question

Consider the following information about Stocks A and B:

				Rate of Return if State Occurs
State of	Probability of
Economy	State of Economy			Stock A			Stock B
Recession		0.30			0.10		−	0.25
Normal		0.40			0.17			0.12
Irrational exuberance		0.30			0.11			0.45

The market risk premium is 8 percent, and the risk-free rate is 3 percent. (Round your answers to 2 decimal places. (e.g., 32.16))

  

The standard deviation on Stock A's return is ___ percent, and the Stock A beta is . The standard deviation on Stock B's return is ___ percent, and the Stock B beta is ___ .

Answer 1

Working standard deviation is given in excel

Working for Beta using CAPM model

ERi​=Rf​+βi​(ERm​−Rf​)

where:

ERi​=expected return of investment

Rf​=risk-free rate

βi​=beta of the investment

(ERm​−Rf​)=market risk premium​

We can use this equation to fine beta of stock, by rearranging the equation we get

Βi = ERi / (ERm​−Rf​) - Rf

We are given market risk premium as 8% and risk free rate as 3%

Substituting in the above formula for each stock we get

Beta of A = 1.61

Beta of B = 3.20