Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns:
Market Return Aggressive Stock Defensive Stock
5% 2% 3.5%
20 32 14
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 5% or 20%?
c. If the T-bill rate is 8%, and the market return is equally likely to be 5% or 20%, draw the SML for this economy.