Consider an economy that is binary; that is, it is either in a state of boom or bust. There are two firms to consider, Aggressive Adventuring and Defensive Deals. The following shows the average returns for the market and these two firms in the states of the economy.

Economy	Martket Return	Aggressive Advertising	Defensive Diggers
Bust	-8%	-10%	-6%
Boom	32%	38%	24%

1) Compute the beta for each stock.

2) Assume each state of the economy is equally likely. Determine the expected return on a portfolio containing the market's securities, AA's stocks, and DD stocks.

3) Assume now that we have a new state of the ecomony, where treasury bill rates are 2% and market returns are 15%. What is the expected return of each stock? Use your beta from 1).

4) What are the shortcomings of the assumptions used for the calculations in 3)?