Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

8% 2% 10%

16% 25% 15%

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 60% likely to be 8% and 40% likely to be 16%?

c.If the T-bill rate is 1.5% and the market return is 60% likely to be 8% and 40% likely to be 16%, draw the SML for this economy. Which stock is underpriced? Which stock is overpriced? Why?