Suppose the economy can be in one of the following two states:state 1 and state 2. Eachstate can occur with an equal probability. The annual returnon the market and a certainsecurity X in the two states are as follows:Market:at the end of the year, the market is expected to yield a returnof15% in state 1 and a return of5% in state 2.Security X:at the end of the year, the security is expected to yield a returnof7.5% in state 1 and a return of 2.5% in state 2.Furthermore, assume that the annual riskfree rate is2%.

1.(Calculate the beta of security X relative to the market.

2.Calculate the alpha (i.e., the Jensens alpha) of security X.

3. Draw the security market line (SML). Please label the axes and all points(including the market portfolio, the risk free security, and security X) in the graphclearly. Identify alpha in the graph.