3. Consider the simple two-period model. Let today be period zero and tomorrow be period 1. Assume that todays price of AAA stock is $23 and tomorrow price could be $28 or $21 with equal probabilities.

a. (1 mark) What is the expected rate of return on AAA stock? b. (2 marks) What is the risk of AAA stock? c. (2 marks) Assume that you want to allocate your initial wealth of $1,000 on a portfolio that consists of AAA stock and of BBB stock, with equal weights to each stock. If BBB stock is currently traded at $24 has an expected rate of return of 4 percent, variance of 900 and covariance between the two stocks is 25. Find the expected rate of return on this portfolio and its risk.