(Answered) Suppose you observe the following situationa calculate the

Management Studies

Suppose you observe the following situation:

a. Calculate the expected return on each stock.

b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by .25, what is the expected market risk premium?

State of Economy	Probability of State	Return if State Occurs Stock A	Return if State Occurs Stock B
Bust	.10	-.12	-.05
Normal	.65	.09	.10
Boom	.25	.35	.21

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