Consider an economy with two states which occur with equal probability. Suppose the CAPM holds. The risk free rate is 2%. The market portfolio has an expected return of 12% and generates the state dependent payoff (100, 200) at t=1. There are two assets. Asset A generates the state dependent payoff (10,40) at t=1. Asset B generates the state dependent payoff (30,20) at t=1.

1. (a) Determine the beta of each of the assets? [4p]

2. (b) Suppose an investor has mean variance (CAPM-) preference and can either choose

   asset A or asset B for free. Which asset should he choose? [6p]

3. (c) What is the maximum price the investor is willing to pay for the chosen asset? [2p]