Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

5% 2% 8%

20% 25% 20%

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 equally likely to be 5% or 20%?
3. If the T-bill rate is 4% and the market return is equally likely to be 5% or 20%, draw the SML for this economy.
4. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?