You are a financial analyst and you try to value an asset A (i.e. find its market price). That asset generates a single cash-flow in one year, which depends on the state of the economy

The risk-free rate is 3.5%. is the annual returns on the market portfolio depending on the state of the economy. Let denote the value (or price) of project A and its exposure to systematic risk.

a. Using information in the table above, write the expected return on A as a function of .

b. Write as a function of (Hint: express A's return in each state of the economy as a function of , then using your answer to the previous question, compute the covariance between A and the market portfolio as a function of ).

c. Using the CAPM equation and your answers to the previous questions, compute .

d. Suppose that project has exactly the same exposure to market risk as project A. Project will generate an expected cash-flow of $10,000 each year from next year on. What is the value of ?

TM State Depression Normal Boom Probability 0.3 0.5 0.2 CF from A $150,000 $100,000 $90,000 -1% 9% 15%