Question: 1 . Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4 % - 2 % 6 %

1. Expected return on two stocks for two particular market returns:
Market Return Aggressive Stock Defensive Stock
4%-2%6%
20%22%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 3% or 20%?
c. If the T-bill rate is 2% and the market return is equally likely to be 3% or 20%, draw the SML for this economy.
d. Which stock is undervalued and which stock is overvalued? Why?

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