Please solve Only Question No. 3. Please give full explanation and all the relevant steps for Question No. 3

Question No. 3. .What is the beta of Small in the problem above? What is the beta of Big? If the CAPM is true, is Small in equilibrium, is it undervalued or is it overvalued? What about Big? You may continue to assume that the risk-free rate is 1%.

1. Based on historical data, you have estimated the following probability distributions for the retums on two individual securities (SMALL and BIG) and the value-weighted market portfolio: probability 0.30 0.20 State Market Expansion Normal Recession 25% 15% 0% 8% 6% 2% 12% 10% 3% a Calculate the expected return and standard deviation of returm for b) Falculate the covariance between Small and Big; between Small c) Calculate the expected return and standard deviation of return for a d) Calculate the expected return and standard deviation of return for a e Compare the five investment opportunities: the two portfolios in Small, Big and the market portfolio and the market, and between Big and the market. portfolio that consists of Big and Small. portfolio that consists of 3/4 Big and 1/4 Small c) and d), the individual securities Small and Big, and the market portfolio. Without performing any calculations, can you recommend buying (or not buying) any of these investments? 2.The investment opportunity set above has been enhanced by the inclusion of a risk-free investment that pays 1%. Does access to this asset change your answer to le) above? Feel free to use calculations