Question: Consider an economy where we have two times, today (t = 0) and tomorrow (t = 1). At time t = 1, the economy will

Consider an economy where we have two times, today (t =

Consider an economy where we have two times, today (t = 0) and tomorrow (t = 1). At time t = 1, the economy will end up in one of two states (s), boom (s = h) or recession (s = 1): There are two financial assets in the economy which we can invest in, asset A and asset B. The price of the assets at the time t = 0 can be summarized in the following price vector: Po = ( PA PB ) = ( 5/25/2 ) The prices at time t = 1 can be summarized in the following price matrix (the top scripts (s = 1; h) indicates whether the economy is in a boom or recession) PA PB 1 2 PX Ph 10 5 Pi The number of units of the two assets we have purchased can be summarized in the vector 2 X= (A)-() a) What is the value of our portfolio at time t = 0? b) What is the value of our portfolio at time t = 1? c) How can we set up a portfolio that has a value equal to 2 at time t = 1 no matter what state the economy ends up in? d) What is the value of the portfolio in question c) at time t = 0? What can you say about the risk-free interest rate in the economy? Consider an economy where we have two times, today (t = 0) and tomorrow (t = 1). At time t = 1, the economy will end up in one of two states (s), boom (s = h) or recession (s = 1): There are two financial assets in the economy which we can invest in, asset A and asset B. The price of the assets at the time t = 0 can be summarized in the following price vector: Po = ( PA PB ) = ( 5/25/2 ) The prices at time t = 1 can be summarized in the following price matrix (the top scripts (s = 1; h) indicates whether the economy is in a boom or recession) PA PB 1 2 PX Ph 10 5 Pi The number of units of the two assets we have purchased can be summarized in the vector 2 X= (A)-() a) What is the value of our portfolio at time t = 0? b) What is the value of our portfolio at time t = 1? c) How can we set up a portfolio that has a value equal to 2 at time t = 1 no matter what state the economy ends up in? d) What is the value of the portfolio in question c) at time t = 0? What can you say about the risk-free interest rate in the economy

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Say there are two periods: today ( date 0 ) and tomorrow ( date 1 ) . Using the notation introduced in Lecture 1 there are s = 1 , dots, S possible states of the world at date 1 . There are N traded...

PArT one. Show, steps and calculations clearly! The demand curve for pizza in the Smalltown is: Qd = 120 - P, where Qd represents the quantity demanded of pizza in the Smalltown, and P represents the...

2 a. Suppose that the government is restricted in its choice of income tax schedule to an affine income tax schedule { = a + ba where 0 0 who purchases commodities r and y at market prices p, > 0 and...

discuss the following economics statement and give concise short answers thank you 6. (10) Consider the standard growth model in discrete time. There is a large number of identical households...

use the essential reference to solve the problem please 6. (10) Consider the standard growth model in discrete time. There is a large number of identical households (normalized to 1). Each household...

question; 6. (10) Consider the standard growth model in discrete time. There is a large number of identical households (normalized to 1). Each household wants to maximize life-time discounted utility...

Please read the Case Study "Not an Option to Even Consider:" Contending With the Pressures to Compromise (A) ? It is at page no.63 , and give the summary of the case D21 Case Study Assignment - BUS X...

Read the Case Study, "Not an Option to Even Consider:" Contending With the Pressures to Compromise (A) ? at page no 63. and answer these questions. ? What are the gaps between the current state and...

Provide the correct solutions...m 2. Consider an economy with two goods, two consumers, and one firm. The firm produces f(L) = min {5L, 15} units of food when it uses L 2 0 units of labor as input....

"Not an Option to Even Consider:" Contending With the Pressures to Compromise (A) School of Business, Simmons University, Boston, MA Ajith sighed as he hung up the phone. Once again, the health...

Write a comment on the following statement: Saving is no longer necessary in a modern technological advanced economy, where advanced financial institutions can create instant credit in the billions...

For firm needs 1,000,000 barrels of WTI crude oil 6 months from today. You enter into a forward contract to receive WTI crude oil 6 months from today. The current price of a barrel of WTI is $43, the...

We inadvertently filed and paid sales tax on some transaction that are not taxable. They involved a general service that is exempt from sales tax.Gramamr correct

The majority of workplace homicides are the result of Muluple Cholce robberles and related crime management pressure Intentional sabotage of safety equipment frustration and anxiety

How could any of these verbal elements be made stronger?

Will this tactic advance the organization toward its awareness objectives?

Does your message use pretentious or exaggerated language?