Question 4 (some pants have multiple possible solutions) The world economy next year is going to be in one of three states: 1, 2, or 3. You have the following information on the rerums to the world market portfolio and the U.K. market portfolio: Sine State? Susie {probability 0.25) | (probability 0.5) | (probability 0.25) “World Market Portfolio 30% i 10% =15% UK. Portfolio 15% i 10% 8% ‘The world and UK risk free rates are 6%, a) What are the expected remms and standard deviations of the world and U.K. portfolios? What are the correlation and the covariance of returns of the two portfolios? (feel free to use EXCEL or other electronic means to compute the statistics). >) a (world) CAPM setting, what is the (world) beta of the U. K. portfotio? Consider an all-cquity financed UK company with a return which is (state-by-state) equal to that of the world market, The expected value of the firm next year is S1OOM. What is the firm worth today, if all of its investors can only invest in the UK? How about the case where the firm’s investors have access to the world marke:? 4) What proportion of the world market portfolio is currently made up by the UK. portfolio? ‘You know the following: if the U.K. portfolio were to be taken out of the world market, then the expected return-of the remaining world portfolio would be ¥4 % lower than that of the overall ‘world market portfolio rerum which you computed above,