1. YearBustNormalBoom 1--170.190.8 0.01 Black Portfolio Price 639 White Portfolio Price 2235 Yield rate=8%

2. YearBustNormalBoom 1--170.190.8 0.01 Yield rate=8% Black Portfolio Expected annual return = 0.19*1000+0.8*100+0.01*(-20000) = 70 White Portfolio Expected annual return = 0.19*(-500)+0.8*300+0,01*10000 = 245 NPV of Black Portfolio = -639+70*PVIFA(8%, 17)= 0 NPV of White Portfolio = -2235+245*PVIFA(8%, 17) = 0 State of EconomyBlack PortfolioWhite Portfolio Boom-2000010000 Normal100300 Bust1000-500

3. State of Economy Black PortfolioWhite Portfolio Boom-2000010000 Normal100300 Bust1000-500 YearBustNormalBoom 1--170.5 Black Portfolio Expected annual return = 0.5*1000+0.5*100 = 550 White Portfolio Expected annual return = 0.5*(-500)+0.5*300 = -100 Year 1—17 NPV of Black Portfolio = 550*PVIFA(8%, 17)= 5017 NPV of White Portfolio = -100*PVIFA(8%, 17) = -912 Normal 50% Bust 50%

6. YearBustNormalBoom 1--130.20.8 14--170.8 0.2 State of EconomyBlack PortfolioWhite Portfolio Boom-2000010000 Normal100300 Bust1000-500 Black Portfolio Year 1—13 Expected annual return = 0.2*1000+0.8*100 = 280 Year 14—17 Expected annual return = 0.8*1000+0.2*(-20000) = -3200 White Portfolio Year 1—13 Expected annual return = 0.2*(-500)+0.8*300 = 140 Year 14—17 Expected annual return = 0.8*(-500)+0.2*10000 = 1600 Year 1—17 NPV of Black Portfolio = 280*PVIFA(8%, 13)+(-3200)*PVIFA(8%, 4)/1.08 13 = -1684 NPV of White Portfolio = 140*PVIFA(8%, 13)+1600*PVIFA(8%, 4)/1.08 13 = 3055

7. Real Market Situation YearBustNormalBoom 1--13 √ 14--16√ 17 √ State of EconomyBlack PortfolioWhite Portfolio Boom-2000010000 Normal100300 Bust1000-500 Black Portfolio Price=638.5 Year 1—13 Annual return=100 Year 14—16 Annual return=1000 Year 17 Annual return=-20000 NPV = -638.5+100*PVIFA(8%, 13)+1000*PVIFA(8%, 3)/1.08 13 -20000/1.08 17 =-4306 White Portfolio Price=2234.8 Year 1—13 Annual return=300 Year 14—16 Annual return=-500 Year 17 Annual return=10000 NPV = -2234.8+300*PVIFA(8%, 13)-500*PVIFA(8%, 3)/1.08 13 +10000/1.08 17 =2365