Suppose you have $1,000 and you have to make a decision to set the portfolio which is consist of two possible options, one is the Cetificate of Deposit (CD) and the other is a bond. CD pays interest rate, r = 5 (%), while a bond for a year that would also pay r = 5 (%) interest rate (coupon value) as well; however there is a probability = 0.6 that the value of bond may increase by g = $50 (capital gains) and the probability (1) = 0.4 of l = $40 (capital loss).

1. Suppose you put $500 into the CD and $500 into a bond. How much you have after a year?

2. (Mean Value Analysis) What is the (the mean of the probability distribution) in this problem?

3. (Mean Value Analysis) What is the (the variance of the probability distribution) in this problem?

4. = + . Find a value of and and draw a graph where x-axis is and y-axis is .