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  3. 4) suppose the economy can be in one of the follow

4) Suppose the economy can be in one of the following two states: state 1...

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4) Suppose the economy can be in one of the following two states: state 1 and state 2. Each state can occur with an equal probability. The annual return on the market and a certain Security X in the two states are as follows: Market: at the end of the year, the market is expected to yield a return of 15% in state 1 and a return of -5% in state 2. Security X: at the end of the year, the security is expected to yield a return of -7.5% in state 1 and a return of 2.5% in state 2. Furthermore, assume that the annual risk-free rate is 0%. a) Calculate the beta of Security X relative to the market. b) Calculate the alpha (i.e., the Jensen's alpha) of Security X. c) Draw the security market line (SML) and identify Jensen's alpha on the SML graph. Please label the axes and all points (including the market portfolio, the risk-free security, and Security X) in the graph

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