The table below shows the no-arbitrage prices of securities A and B and the cash flows for security C under both the weak economy and the strong economy scenarios. The risk-free interest rate is

4%.

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

		Cash Flow in One Year
Security	Market Price Today	Weak Economy	Strong Economy
Security A	$231	$0	$600
Security B	$346	$600	$0
Security C		$600	$1,800
Security D		$1,800	$600

a. Security C has the same payoffs as what portfolio of the securities A and B?

b. Security D has the same payoffs as what portfolio of the securities A and B?

c. What is the no-arbitrage price of security C?

d. What is the no-arbitrage price of security D?

e. What is the expected return of security C if both states are equally likely? What is its risk premium?

f. What is the expected return of security D if both states are equally likely? What is its risk premium?

g. What is the difference between the return of security C when the economy is strong and when it is weak?

h. If security C had a risk premium of

10%,

what arbitrage opportunity would be available?

i. What is the difference between the return of security D when the economy is strong and when it is weak?

j. If security D had a risk premium of

10%,

what arbitrage opportunity would be available?