Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: So if the market returns 8% in one possible scenario then

Market Return Aggressive Stock Defensive Stock

8 % 3.9 % 5.7 %

20 30 14

a.) What are the betas of the two stocks (aggressive stock and defensive stock)?

Hint: The beta is the sensitivity of the stock's return to the market return, or, the change in the stock return per unit change in the market return.

Use the equation Beta = (expected return by stock in 8% return market expected return in 20% market) / (market return in scenario A - market return in scenario B)

b.) What is the expected rate of return on each stock if the market return is equally likely to be 8% or 20%? Hint: Use a weighted average here

c.) If the T-bill rate is 8%, and the market return is equally likely to be 8% or 20%, what are the alphas of the two stocks?