26 Jun You have prepared the following scenario analysis for the returns of the
You have prepared the following scenario analysis for the returns of the market index portfolio, M, and a stock. Assume that each scenario is equally likely. 1. Rate of return Scenario Bust Boom Market 10% 30% Stock 14% 26% a. Find the variance of the market and the stock, and beta of the stock. b. What is the expected rate of return on the stock and the market index? If the T-bill rate is 6 percent, what does the CAPM say about the fair expected rate of return on the stock (i.e., the rate of return commensurate with the risk of the stock)? Is the stock overpriced or underpriced? What passive portfolio comprised of the market index and T-bills would have the same systematic risk as the stock? What would be the expected rate of return on that portfolio? C.
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