(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the

contingent returns given here.

(a.) Calculate the expected returns on the stock market and on Chicage Gear stock.

(b.) What is Chicago Gear's beta?

(c.) What is Chicago Gear's required return according to the CAPM?

REALIZED RETURNS

State of the Market Probability that State Occurs Stock Market Chicago Gear

Stagnant 0.2 -10% -15%

Slow growth 0.35 10 15

Average growth 0.3 15 25

Rapid growth 0.15 25 35

contingent returns given here.

(a.) Calculate the expected returns on the stock market and on Chicage Gear stock.

(b.) What is Chicago Gear's beta?

(c.) What is Chicago Gear's required return according to the CAPM?

REALIZED RETURNS

State of the Market Probability that State Occurs Stock Market Chicago Gear

Stagnant 0.2 -10% -15%

Slow growth 0.35 10 15

Average growth 0.3 15 25

Rapid growth 0.15 25 35