1. Suppose there are three states of nature and three risky securities with payoffs A = (1, 0, 0),

B = (0, 1, 0), and C = (0, 0, 1). Explain whether this is a complete market and why.

2. An investor holds an efficient portfolio with mean return of 12% and standard deviation of 15%. Assume that the risk-free rate is 8%, that the mean return on the market portfolio is 11.2%, and that the CAPM holds. Answer the following questions:

1. What is the beta of this portfolio (show all the details of your calculations and display the results with four decimal places)?
2. Suppose that the investors total wealth is 100, invested entirely in market shares. Considering your answer in (a) above, is this investor borrowing or lending and how much?

3. Suppose that FaceLook and and Macrosoft wish to borrow $100 million for a period of ten years and that they have been offered the rates per annum shown below. FaceLook requires a floating-rate interest and Macrosoft wants a fixed-rate investment. Assume that a bank, acting as intermediary, requires 0.3% p.a.

	Fixed Rate	Floating Rate
FaceLook	3.0% p.a.	LIBOR
Macrosoft	3.8% p.a.	LIBOR

Explain in detail how both companies can benefit from a swap.