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

Market Return Aggressive Stock Defensive Stock

4% -5% 6%

20% 30% 10%

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 40% likely to be 4% and 60% likely to be 20%?
3. If the T-bill rate is 5% and the market return is 40% likely to be 4% and 60% likely to be 20%, draw the SML for this economy.
4. Between aggressive and defensive stocks, which one is undervalued, which is overvalued, and why?