Question: Suppose that you are a consumer solving a two period optimization problem, and that there are two possible states of the world next period, representing

Suppose that you are a consumer solving a two period optimization problem, and that there are two possible states of the world next period, representing low L or high H future consumption. Suppose that there are two stocks, each with zero dividend, whose prices at present and in each future state are given below.

Price Current Stock A Stock B 2.1 1.5 State L State H

1 1 3 (a) (10) Using the law of one price, find

Price Current Stock A Stock B 2.1 1.5 State L State H 1 1 3 (a) (10) Using the law of one price, find the stochastic discount factor M1 in states L and H.

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