Expected return on two stocks for particular market returns:

Market Return Aggressive Stock Defensive Stock

5% -2 6%

25% 38% 12%

a. What are the betas of the two stocks?

b. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%?

c. If the T-bill rate is 6% and the market return is equally likely to be 5% or 25%, draw the SML for this economy?