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

Market Return Aggressive Stock Defensive Stock

4% -5% 7%

20% 25% 14%

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 4% or 20%?
3. If the T-bill rate is 5% and the market return is equally likely to be 4% or 20%, draw the SML for this economy.