Consider the following expectations for the market and two stocks in two possible equally likely states:

State Boom Recession

Market Return $25\%$

$5\%$

$1$

Stock A $38\%-2\%$

Stock B $12\%6\%$

What is the expected return on each stock?

Given that the risk$-$free rate is $6\%,$ draw the Security Market Line $($SML$)$ for this economy, and plot the two securities on the graph given that you have computed Stock A has a of $2$ and Stock B has a of $0\mathrm{.}3.$

Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?