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

Market Return Aggressive Stock Defensive Stock

3% -4% 5%

18% 25% 14%

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 18%?

c. If the T-bill rate is 4% and the market return is equally likely to be 3% or 18%, draw the SML for this economy.