$2.$ Expected return on two stocks for two particular market returns:

Market Return Aggressive Stock Defensive Stock

$4\%2\%8\%$

$20\%30\%16\%$

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 $40\%$ likely to be $4\%$ and $60\%$ likely to be $20\%?$

c$.$ If the T$-$bill rate is $3\%$ and the market return is $40\%$ likely to be $4\%$ and $60\%$ likely to be $20\%,$ draw the SML for this economy.

d$.$ Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?