You are considering the purchase of two stocks, A and B. The initial price of each stock is $100. The prices of the stocks at the end of the year depend on the state of the economy over the year as follows (neither stock pays a dividend):

			Price in One Year
State of the Economy	Probability	Stock A	Stock B
Boom	0.4	110	126
Moderate Growth	0.4	106	112
Recession	0.2	96	83

A European put option on one underlying share of stock B with a strike price of $112 and time to expiration of 1 year has a premium of $10. Consider a portfolio where you buy one share of stock B and buy one put option. What is the one-year holding period rate of return on this portfolio for each state of the economy? What is the expected rate of return on the portfolio? What is the standard deviation? In what sense does buying the put option when you own the stock constitute a purchase of insurance in this case? You can invest in either Stock B or T-bills (risk-free rate = 4%). What is your certainty equivalent rate of return? Which will you choose? What is the level of risk aversion for which the investor is indifferent between Stock B and T-bills? A=5