Suppose that we can describe the world using two states and that two assets are available, asset K and asset L. We assume the assets future prices have the following distributions:

State	Future Price Asset K	Future Price Asset L
1	$25	$21
2	$20	$27

Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.

Let K(1) = $20 denote the time 1 price of asset K and L(1) = $19 the time 0 price of asset L.

(a) Assuming no arbitrage opportunities, what are the values of the unit claims, at time 1?

(b) What is the risk-free rate of return that must exist in this market?

(a) Please show work how the answer could be C1 = 32/51 and C2 = 11/51

Suppose 1 is the price of unit claim on state 1, and 2 is the price of unit claim on state 2. Then you will have the follow two equations 251 + 202 = 20 211 + 272 = 19 Solving the two equations, you should get 1 = 32/51 , 2 = 11/51.