Question: Problem: State preference theory Mr. Ben has initial wealth Wo=$12,000 and faces an uncertain future that he partitions into three states, S=1, S=2, and S=3.

Problem: State preference theory Mr. Ben has initial wealth Wo=$12,000 and

Problem: State preference theory Mr. Ben has initial wealth Wo=$12,000 and faces an uncertain future that he partitions into three states, S=1, S=2, and S=3. He can invest in three securities, J, K, L, with initial prices of Ps=$5.2, Pk=$4, and P =$4, and the following payoffs table: Payoffs Security S=1 S=2 S=3 J $6 $2 $10 K $8 $8 $0 L $5 $5 $5 1. Form a portfolio (including securities J, K, and L) that can achieve the $15,680 following payoff structure $1,680 Compute its price. Could Mr. \$23,300) BEn buy this portfolio? 2. Form all the pure securities using the traded assets. 3. Find the price of pure securities and compute the risk free rate. 4. YY is a new company considering offering their shares to the market. $1 Each YY stock will achieve the following payoffs( $10 Are there any $25 arbitrage profits that can be realized if the offering price is $11? If yes, present the arbitrage strategy and its outcome. Problem: State preference theory Mr. Ben has initial wealth Wo=$12,000 and faces an uncertain future that he partitions into three states, S=1, S=2, and S=3. He can invest in three securities, J, K, L, with initial prices of Ps=$5.2, Pk=$4, and P =$4, and the following payoffs table: Payoffs Security S=1 S=2 S=3 J $6 $2 $10 K $8 $8 $0 L $5 $5 $5 1. Form a portfolio (including securities J, K, and L) that can achieve the $15,680 following payoff structure $1,680 Compute its price. Could Mr. \$23,300) BEn buy this portfolio? 2. Form all the pure securities using the traded assets. 3. Find the price of pure securities and compute the risk free rate. 4. YY is a new company considering offering their shares to the market. $1 Each YY stock will achieve the following payoffs( $10 Are there any $25 arbitrage profits that can be realized if the offering price is $11? If yes, present the arbitrage strategy and its outcome

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