You are considering purchasing 10-year Treasury securities. Treasury strips with a 10-year maturity currently offer a 3.7% annual nominal yield. Treasury Inflation Protected Security strips (TIPS) with a 10-year maturity currently offer a 1.5% annual real yield. There is substantial uncertainty about the rate of inflation. There are three possible inflation scenarios that are equally likely:

Scenario	Annual Inflation Rate	Probability
Low Inflation	1%	33.33%
Medium Inflation	3%	33.33%
High Inflation	5%	33.33%

a. Suppose you are a tax-exempt investor. Compute the real annual returns of the two types of Treasury securities in each of the three scenarios. Compute the means and the standard deviations of the real annual returns for the two types of Treasury securities. Which Treasury security looks more attractive?

b. Suppose you are a taxable investor and interest income from Treasury securities is taxed at a 35% tax rate. Compute the real annual after-tax returns of the two types of Treasury securities in each of the three scenarios. Compute the means and the standard deviations of the real annual after-tax returns for the two types of Treasury securities. Which Treasury security looks more attractive?