We know the prices and payoffs for securities 1 and 2 and they are represented as...

 

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We know the prices and payoffs for securities 1 and 2 and they are represented as follows: Cash Flow in One Year Strong Economy $225 $0 Security 1 2 Market Price Today $90 $110 Weak Economy $0 $225 a. What is the risk-free interest rate? b. Consider a risk-free security that has a payoff in one year of $2,500. i. How many units of each of securities 1 and 2 would be needed to replicate this risk-free security? ii. Based on part b.i), what is the market price today of this risk-free security? iii. Based on part a), what is the market price today of this risk-free security? c. Consider a security that has a payoff in one year of $2,500 if the economy is weak and $5,000 if the economy is strong. i. How many units of each of securities 1 and 2 would be needed to replicate this security? The risk-free interest rate is ii. Based on part c.i), what is the market price today of this security? d. Consider a security that has a payoff in one year of $5,000 if the economy is weak and $2,500 if the economy is strong. i. How many units of each of securities 1 and 2 would be needed to replicate this security? ii. Based on part d.i), what is the market price today of this security? e. Explain the economic reasoning as to why the security in part c) has a lower price than the security in part d). a. What is the risk-free interest rate? %. (Round to four decimal places) b.i. Consider a risk-free security that has a payoff in one year of $2,500. How many units of each of securities 1 and 2 would be needed to replicate this risk-free security? The units of security 1 needed to replicate the payoff of the new security in the strong economy is (Round to the nearest integer). (Round to the nearest integer). The units of security 2 needed to replicate the payoff of the new security in the weak economy is b.ii. Based on part b.i), what is the market price today of this risk-free security? The market price today of the new risk-free security is $ b.iii. Based on part a), what is the market price today of the new risk-free security? The market price today of this new security is $ to the nearest dollar). (Round to the nearest dollar). We know the prices and payoffs for securities 1 and 2 and they are represented as follows: Cash Flow in One Year Strong Economy $225 $0 Security 1 2 Market Price Today $90 $110 Weak Economy $0 $225 a. What is the risk-free interest rate? b. Consider a risk-free security that has a payoff in one year of $2,500. i. How many units of each of securities 1 and 2 would be needed to replicate this risk-free security? ii. Based on part b.i), what is the market price today of this risk-free security? iii. Based on part a), what is the market price today of this risk-free security? c. Consider a security that has a payoff in one year of $2,500 if the economy is weak and $5,000 if the economy is strong. i. How many units of each of securities 1 and 2 would be needed to replicate this security? The risk-free interest rate is ii. Based on part c.i), what is the market price today of this security? d. Consider a security that has a payoff in one year of $5,000 if the economy is weak and $2,500 if the economy is strong. i. How many units of each of securities 1 and 2 would be needed to replicate this security? ii. Based on part d.i), what is the market price today of this security? e. Explain the economic reasoning as to why the security in part c) has a lower price than the security in part d). a. What is the risk-free interest rate? %. (Round to four decimal places) b.i. Consider a risk-free security that has a payoff in one year of $2,500. How many units of each of securities 1 and 2 would be needed to replicate this risk-free security? The units of security 1 needed to replicate the payoff of the new security in the strong economy is (Round to the nearest integer). (Round to the nearest integer). The units of security 2 needed to replicate the payoff of the new security in the weak economy is b.ii. Based on part b.i), what is the market price today of this risk-free security? The market price today of the new risk-free security is $ b.iii. Based on part a), what is the market price today of the new risk-free security? The market price today of this new security is $ to the nearest dollar). (Round to the nearest dollar).