Question

Consider the following table, which gives a security analyst’s expected return on two stocks in two...

Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market:

Market Return

Aggressive Stock

Defensive Stock

5%

-2%

6%

25

38

12
  1. 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.
  1. Plot the two security on the SML graph. What are the alphas of each?
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