In a one-period two-state economy the risk-free interest rate over the period is 25%. An asset that

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In a one-period two-state economy the risk-free interest rate over the period is 25%. An asset that pays out 100 in state 1 and 200 in state 2 trades at a price of 110.

(a) What is the no-arbitrage price of a second risky asset that pays out 200 in state 1 and 100 in state 2?

(b) If this second risky asset trades at a higher price than what you computed in (a), how can you obtain a risk-free profit?

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Financial Asset Pricing Theory

ISBN: 9780198716457

1st Edition

Authors: Claus MUNK

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Question Posted: Jul 20, 2024 09:00 AM

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In a one-period two-state economy the risk-free interest rate over the period is 25%. An asset that

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Financial Asset Pricing Theory

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