There are two possible future states. State 1, in which the pandemic forces us to go into another lockdown this winter, happens with probability 0.3. State 2, in which we continue to progress toward normalcy this winter, happens with probability 0.7. The following table contains the current prices of Zoom and United as well as their possible

prices in the two future states. Assume no arbitrage.

[3 points total, 0.5 points each part]

Possible prices

Stock Price State 1 State 2

Zoom $281, $337, $287

United $44, $35, $48

Amazon [x], $3,795, $3,623

(a) What are the realized returns on Zoom in states 1 and 2?

(b) What is the expected return on Zoom today?

(c) What is the price of a security that pays $1 in state 1 and $0 in state 2.

(d) What is the price of a security that pays $0 in state 1 and $1 in state 2.

(e) What are the realized values of the stochastic discount factor in states 1 and 2?

(f) Use you answer from part (e) to compute the price of Amazon stock.