Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow.

Question 1:

Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items.

Question 2: a) Plot the Security Market Line (SML)

b) Superimpose the CAPMs required return on the SML

c) Indicate which investments will plot on, above and below the SML?

d) If an investments expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph

Question 3: a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative

b) Compute the expected return of the portfolio thus formed

c) Compute the portfolios beta. Is the portfolio aggressive or defensive?