Question: Given the following probability distributions for Security A and the market portfolio, M: State Probability of Occurrence Return on Security A Return on Market, M

Given the following probability distributions for Security A and the market portfolio, M:

StateProbability of OccurrenceReturn on Security AReturn on Market, M

Bust0.212%2%

Boom0.88%16%

Given that the expected rate of return and the standard deviation of the market portfolio, M, are, respectively, 0.1320 and 0.056, and the inflation rate and risk-free rate are, respectively, 3% and 4%.All rates are expressed in nominal terms.

(a)Calculate the beta, expected return, and standard deviation of Security A.

Hint: You need to calculate the covariance between Security A and the Market!

Based on your answers for part (a),

(b)Calculate the required (CAPM) rate of return on Security A, and explain your investment recommendation on Security A according to the CAPM Analysis, and

(c)assume that you invest $450,000 in Security A and $150,000 in the market portfolio M, calculate the beta, variance, and expected real return of the 2-asset portfolio composing of A and M.

please show all work and round to 4 decimal points. Thanks.

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