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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.

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