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• Consider a simple economy with two equally likely possible states and an investor owns a portfolio worth $400,000 that will pay $0 in state 1 or $1,000,000 in state 2

• What is the expected return and the volatility of return?

• Consider adding a security that costs $500,000 and pays $1,000,000 in state 1 and $0 in state 2

• (The expected return is 0% and the volatility is 100%)

• The risk-free rate is 5%

• Should the investor purchase the security?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92810232

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