Question: Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 3% -3% 6% 20% 25% 12% a. What are

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

Market Return Aggressive Stock Defensive Stock

3% -3% 6%

20% 25% 12%

a. What are the betas of the two stocks?

b. What is the expected rate of return on each stock if the market return is equally likely to be 3% or 20%?

c. If the T-bill rate is 2% and the market return is equally likely to be 3% or 20%, draw the SML for this economy.

d. Which stock is undervalued and which stock is overvalued? Why?

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