Question: Consider the following table, which gives a security analysts expected return on two stocks for two particular market returns: Market Return Aggressive stock Defensive stock

Consider the following table, which gives a security analysts expected return on two stocks for two particular market returns:

Market Return

Aggressive stock

Defensive stock

5%

-2%

6%

25

38

12

  1. What are the betas of the two stocks?
  2. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%?
  3. If the T-bill rate is 6% and the market return is equally likely to be 5% or 25%, draw the SML for this economy
  4. Plot the two securities on the SML graph. What are the alphas of each?

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