1.Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market portfolio:

State probability Small Big Market

Expansion 0.30 25% 8% 12%

Normal 0.5 15% 6% 10%

Recession 0.20 0% 2% 3%

Question:.What is the beta of Small in the problem above? What is the beta of Big? If the CAPM is true, is Small in equilibrium, is it undervalued or is it overvalued? What about Big? You may continue to assume that the risk-free rate is 1%.

Hint: we need to use statstical formula to compute betas.