Problem $1\mathrm{.}3$

In table $1\mathrm{.}3$ below, information about the market index, asset $E$ and the risk$-$free as$-$

set on a normal market are stated. The nominal risk$-$free rate next year is $3\mathrm{.}2\%.$ The

probability of a boom is $45\%.$ Inflation next year is expected to be $3\mathrm{.}1\%.$

Table $1\mathrm{.}3$: Information on prices and cash flows

Problem $1\mathrm{.}3.$a$)$

Calculate the price at $t=0$ of the risk$-$free asset.

Problem $1\mathrm{.}3.$b$)$

Give a brief account of how the Law of One Price can generally be used to determine

the price of assets. No calculations are needed.

Problem $1\mathrm{.}3.$c$)$

Determine a replicating portfolio for asset $E.$

Opgave $1\mathrm{.}3.$d$)$

Calculate the expected nominal return for asset $E$ in the coming year. $($The result

must be presented in percentage$)$