Expected return on two stocks for two particular market returns:

Market return/Aggressive stock/Defensive St 5% -2% 6%

25% 38% 12%

a. What are the beta's of the two stocks?

b. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%?

c. 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.

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