$1.$ Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

$4\%-2\%6\%$

$20\%22\%12\%$

a$.$ What are the betas of the two stocks?

b$.$ What is the expected rate of return on each stock if the market return is equally likely to be $3\%$ or $20\%?$

c$.$ If the T$-$bill rate is $2\%$ and the market return is equally likely to be $3\%$ or $20\%,$ draw the SML for this economy.

d$.$ Which stock is undervalued and which stock is overvalued? Why?