Calculate the expected market return and the risk-free return in the rare disasters model when

(a) bt+1 is uniformly distributed on [0,b∗] for some constant b∗ < 1.

(b) bt+1 = b∗/2 with probability 1 for some constant b∗ < 1.

Explain why the ratio E[Rmt]/Rft is larger in the rare disasters model in case (a)

than in case (b).