A5 Consider a two-period economy with a complete set of financial securities with the follow- ing...
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A5 Consider a two-period economy with a complete set of financial securities with the follow- ing matrix of returns: 32 2 Suppose that the risk-neutral probabilities for this economy are given by and for the first and second state, respectively and the discount factor is given by 2. Compute the prices of the assets. (ii) Suppose that the prices of the first and second asset, instead of being the prices computed in part (i), are given by 6 and 3, respectively. Show that there exists an arbitrage portfolio in this economy. A5 Consider a two-period economy with a complete set of financial securities with the follow- ing matrix of returns: 32 2 Suppose that the risk-neutral probabilities for this economy are given by and for the first and second state, respectively and the discount factor is given by 2. Compute the prices of the assets. (ii) Suppose that the prices of the first and second asset, instead of being the prices computed in part (i), are given by 6 and 3, respectively. Show that there exists an arbitrage portfolio in this economy.
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