Question: Consider an economy with three assets and two dates (t=0,1) and three states at t=1. Let (1.4 i 2 3] X = 2 1 4

Consider an economy with three assets and two dates (t=0,1) and

Consider an economy with three assets and two dates (t=0,1) and three states at t=1. Let (1.4 i 2 3] X = 2 1 4 [1 3 1 p= 1.8 be the matrix of asset payoffs at t=1 and p the vector of asset prices at t=0. Suppose pz=2. (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio Suppose p3=1.2. (c) Does an arbitrage portfolio exist? (d) Can you create a portfolio with payoff of (120, 190, 220) at t=1 and what is the t=0 price of such a portfolio? (e) Determine the (implicit) risk free rate in this economy Consider an economy with three assets and two dates (t=0,1) and three states at t=1. Let (1.4 i 2 3] X = 2 1 4 [1 3 1 p= 1.8 be the matrix of asset payoffs at t=1 and p the vector of asset prices at t=0. Suppose pz=2. (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio Suppose p3=1.2. (c) Does an arbitrage portfolio exist? (d) Can you create a portfolio with payoff of (120, 190, 220) at t=1 and what is the t=0 price of such a portfolio? (e) Determine the (implicit) risk free rate in this economy

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