Question: 1. Consider the three state, two security example that we discussed in class. (a) What is the risk-free rate that is implied by the price

1. Consider the three state, two security example that we discussed

1. Consider the three state, two security example that we discussed in class. (a) What is the risk-free rate that is implied by the price of security 1 ? (b) What is the expected return of security 2 ? (c) Suppose we introduce Security 3 , which pays 0 on both the Recession and Normal states and pays 300 in a boom. Is the market complete? (d) For what values of P3 is there no arbitrage

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