Suppose You Observe the Following Situation Assume the Capital Asset Pricing Model Holds and Stock A's

question 4

Multiple Choice

Suppose you observe the following situation:  $$\begin{array} { l c c } { \text { State of } } & \text { Probability of } & \text { Rate of Return } \\\text { Econony } & \text { State of Economy } & \text { if State Occurs } \\ & &\begin{array}{ll}\text { Stock A } & \text { Stock B }\end{array}\\\text { Boom } & .21& \begin{array}{ll}.189& \quad \quad .097\end{array} \\\text { Normal} & .74& \begin{array}{ll}.158& \quad \quad .076\end{array} \\\text {Recession } & .05 & \begin{array}{ll}-.246 & \quad \quad.42\end{array} \\\end{array}$$
Assume the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .84. What is the expected market risk premium?

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Definitions:

Temporal Contiguity

The idea that events experienced close together in time are readily associated with each other.

Premack Principle

A psychological principle suggesting that more probable behaviors will reinforce less probable behaviors.

Law Of Effect

A principle in psychology stating that behaviors followed by pleasant consequences are likely to be repeated, while those followed by unpleasant consequences are less likely to be repeated.

Reinforcement

A stimulus or event that follows a response and increases the likelihood of that response being repeated.