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

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?

A) 8.28 percent
B) 9.05 percent
C) 10.06 percent
D) 7.94 percent
E) 7.81 percent