Assume we are at t=0, and we expect that at t=1 the economy has a 50% probability to be strong and 50% probability to be weak.

There are two securities traded in the market: A and B. Security As market price at t=0 is $240, and it pays $600 at t=1 if the economy is strong at that time. Security Bs market price at t=0 is $340, and it pays $600 at t=1 if the economy is weak if the economy is strong.

1. Say you have a portfolio which includes one security A and one security B. What is its payoff at t=1?
2. What is the expected rate of return of holding the portfolio in part 1.1?
3. Security C pays $600 at t=1 when the economy is weak or $1800 if the economy is strong. What is the no-arbitrage price of security C?
4. What is the rate of return for security C?
5. Security D pays $1800 at t=1 when the economy is weak or $600 if the economy is strong. What is the no-arbitrage price of security D?
6. What is the rate of return for security D?