Suppose the economy can only be in one of the following two states: (i) Boom or good state and (ii) Recession or bad state. Each of the states can occur with an equal probability. At the beginning of a month, you can purchase the following two securities in the market:

Security 1: It is currently trading at $4. At the end of the month, the stock price is expected to increase by $10 in the good state and expected to remain unchanged in the bad state.

Security 2: It is also currently trading at $5. This asset has payoffs that are like an insurance contract. It yields a positive return when the economic conditions are poor. At the end of the month, the price of security 2 is expected to remain unchanged in the good state and expected to increase by $10 in the bad state

d) Compute the covariance and the correlation between the returns of two securities.

e) Why does the second security have a higher price? Please explain briefly (3-4 sentences)