6.(12 POINTS) Consider the following table of returns for 2 assets and the market portfolio: state T T1 T 2 recession .05 -.02 .06 (2) boom .25 .38 .12 where r and r2 are the rates of return on assets 1 and 2 and rm is the rate of return on the market portfolio. Assume that the probability of each state is 0.5 so that the expected rates of return for stock 1 and stock 2: Eri = (3) .5(-.02) + .50.38) = .18 .5.06) +.50.12) = .09 Er2 = (4) 5 (a) Recalling that: Cov (ri, rm) Bi= (5) om Find B, and 32. (6) Assume that rg = .06. Find the equation of the the securities market line for each stock. Draw the SML for each stock with B on the horizontal axis. Identify each stock. (c) Suppose that analysts have forecasted E (vanalysts) = .18 and E (-analysts) = = .09. Find au and 22. Determine if any of these two assets is underpriced or overpriced. 6.(12 POINTS) Consider the following table of returns for 2 assets and the market portfolio: state T T1 T 2 recession .05 -.02 .06 (2) boom .25 .38 .12 where r and r2 are the rates of return on assets 1 and 2 and rm is the rate of return on the market portfolio. Assume that the probability of each state is 0.5 so that the expected rates of return for stock 1 and stock 2: Eri = (3) .5(-.02) + .50.38) = .18 .5.06) +.50.12) = .09 Er2 = (4) 5 (a) Recalling that: Cov (ri, rm) Bi= (5) om Find B, and 32. (6) Assume that rg = .06. Find the equation of the the securities market line for each stock. Draw the SML for each stock with B on the horizontal axis. Identify each stock. (c) Suppose that analysts have forecasted E (vanalysts) = .18 and E (-analysts) = = .09. Find au and 22. Determine if any of these two assets is underpriced or overpriced