(a) If the expected payoff from a risky project (assume it has two possible payoffs) is zero, what is the relationship between the insurance/risk premium and the certainty equivalent? Give the intuition for your answer.

(b) Consider a portfolio comprised of stock 1 and stock 2. Write down an expression for the variance of the return on this two-stock portfolio. If you want to minimize risk, derive an expression for how much of your portfolio you would invest in stock 1? Explain your answer.

(c) Assume that you may borrow or lend at a riskless rate of return and the CAPM holds. Suppose that you have forecast the correlation coefficient between the rate of return on gold and the rate of return on the market portfolio to be -0.7. Your forecast of the standard deviations of the rates of return are 0.4 for gold and 0.10 for the market portfolio. How would you combine gold and a riskless security to obtain a portfolio with a beta of -1.0? Explain your answer.