Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 6% 2% 10% 18% 25% 15% What are the betas of the two stocks? What is the expected rate of return on each stock if the market return is 55% likely to be 6% and 45% likely to be 18%? If the T-bill rate is 2% and the market return is 55% likely to be 6% and 45% likely to be 18%, draw the SML for this economy. Which stock is underpriced? Which stock is overpriced? Why?

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