Short Answer Questions: For each of the following two questions, write your answers out on one or more sheets of paper, photograph or scan them and submit them though Canvas using the submission link provided. Write neatly so I can read it! Illegible answers will be assumed to be wrong. 1. a. Suppose that Ray Allen, a basketball player for the Seattle Supersonics, will become a free agent at the end of this NBA season. Suppose that Allen is considering two possible contracts from different teams. Note that the salaries are paid at the end of EACH year. Contract #1 (Seattle) Contract #2 (Portland) Signing bonus (paid today) $1 million $1 million First-year salary $2 million $4 million Second-year salary $4 million $4 million Third-year salary $5 million $3 million The interest rate is 10%. Based on this information, which contract should Allen take and why? (8 points) b. Consider the following two assets with probability of return = P, and return = R. Asset A Asset B . R P R 0.40 12.0% 0.20 11.5% 0.50 8.5% 0.50 10.0 0.10 -2.0% 0.30 0.0% Calculate the expected return for each and the standard deviation. Which one carries the greatest risk? Why? Show you work! (9 points) 2. Using both the supply and demand for bonds (loanable funds market) and the liquidity preference frameworks, show how interest rates are affected when the riskiness of bonds rises. Are the results the same in the two frameworks? Use correctly labeled diagrams and explain what is happening and why. Be specific about which curves are shifting and why. (8points) Hint: To answer this question you need to start with axes such as these which you will need to correctly label. Bond Market Market for Money