1. Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

2% -4% 4%

18% 24% 14%

1. What are the betas of the two stocks?
2. What is the expected rate of return on each stock if the market return is 40% likely to be 2% and 60% likely to be 18%?
3. If the T-bill rate is 4% and the market return is if the market return is 40% likely to be 2% and 60% likely to be 18%, draw the SML for this economy.
4. Which stock is undervalued and which stock is overvalued? Why?