Question: Consider the following Table, which gives a security analysts expected returns on two stocks and the market portfolio for two possible economic states: Market Portfolio,

Consider the following Table, which gives a security analysts expected returns on two stocks and the market portfolio for two possible economic states:

Market Portfolio, Aggressive Stock , Defensive Stock

State 1 3% 6% 9%

State 2 9% 24% 18%

a) What are the market betas of the two stocks?

b) What is the expected rate of return on each stock if the economy is equally likely to be in the two economic states?

c) If the T-bill rate is 1% and the economy is equally likely to be in the two economic states. Derive the SML. What is the alpha of each stock?

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