Going forward, the stock market and Bananarama’s stock price have the following probability distribution:
Stock Market Bananarama Stock
Probability Rate of Return Rate of Return
0.2 (4%) (6%)
0.6 8% 10%
0.2 14% 20%
(a) Calculate the expected rate of return for the stock market and for Bananarama’s stock.
Expected rate of return
b) Is Bananarama’s stock more volatile or less volatile that the stock market in genera
(c) Is the Beta for Bananarama’s stock lower or higher that 1.0?
(d) Is Bananarama’s cost of equity higher or lower that the stock market’s average cost of equity?