An economy has two scenarios: boom or bust. Each scenario is equally likely. The returns in each scenario for the market portfolio, stock S, and stock T are provided below. Scenario Rate of Return (%) Market Stock S Stock T -6 -9 32 40 25 Bust Boom 1. Calculate the expected return on market portfolio and on each stock. [2+2+2 marks] 2. Find the beta of each stock. In what way is stock S is an aggressive stock and stock T is a defensive stock? [4+4+1+1=10 marks] 3. If you create a portfolio with 40% on stock S, 40% on stock T and 20% on Market, what will be the beta of your portfolio? [4 marks] 4. If the Treasury bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?[2+2 marks] Hints: Use SML to find fair expected return. Think smartly about the market return! 5. Based on CAPM, identify whether the stocks are correctly priced or overpriced or underpriced. What shall do you recommend if a stock is overpriced? Is underpriced? [2+2+2 marks]