Exercise 6.7 (Leverage) In the securities market considered in Exercise 6.1, suppose that P(1) = P(2) =

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Exercise 6.7 (Leverage) In the securities market considered in Exercise 6.1, suppose that P(ω1) = P(ω2) = 1/2. Calculate the mean rate of return for security S1(1). Also, compute the mean rate of return for the call option considered in Exercise 6.6. Explain why the mean rate of return for the option is much higher than that for the underlying security.

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