Consider the following Table, which gives a security analysts expected returns on two stocks and the market portfolio for two possible economic states:

Market Portfolio / Aggressive Stock / Defensive Stock

State 1: 2% / 6% / 3%

State 2: 10% / 22% / 11%

a) What are the market betas of the two stocks?

b) What is the expected rate of return on each stock if the economy is equally likely to be in the two economic states?

c) If the T-bill rate is 1% and the economy is equally likely to be in the two economic states. Plot the two securities on the SML graph. What are the alphas of each?

d) Are there arbitrage opportunities? Explain.