1.The return characteristics for assets A and B can be described as follows: Economy Return on A Return on B Probability Good 15% 13% 0.2 Normal 11% 10% 0.4 Bad 7% 8% 0.4 Compute the expected return and standard deviation on each asset.

2. Stock Y has a beta of 1.60 and an expected return of 16%. If the risk-free rate is 3% and the market risk premium (expected market return minus risk-free rate) is 6%, is this stock undervalued of overvalued according to the CAPM (or SML)? Why or why not?