1. Assume the following investment opportunities on the market shown in Table 1. They generate a certain cash flow in t=1, which depends on the state of the economy. Table 1: Economy The risk-free rate is 2%. Investors demand a risk premium of 5% for imvesting in the market index. The probabily for the economy to be weak is 50%. a) Compute the arbitrage-tree prices of the market index and the risk.tree bondl b) Design the cash fow of security B in a way that a portfolio of the market index and security B replicale the cash flow of the risk tree bond c) Compute the arbitrage-free price of security B! d) What is the expected return of security B