1Q. Use the following facts for (all parts of) this problem:

There is only one factor that affects stock returns, and it is the growth in industrial production

There are three possible states of the world: Ugly, Bad and Good. We know exactly how much

return the following three securities (A, B and C) will yield in each of the possible states:

State

Ugly

Bad

Good

Probability

1/3

1/3

1/3

Growth in production

0%

5%

10%

Stock A

16%

6%

-4%

Stock B

4%

9%

14%

Stock C

2%

12%

22%