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1. (a) Define the following terms: i. Arbitrage-free; and ii. Risk-aversion. (b) Let P(0) be the current price of a risky asset. Prove that a

1. (a) Define the following terms: i. Arbitrage-free; and ii. Risk-aversion. (b) Let P(0) be the current price of a risky asset. Prove that a consequence of a risk-averse market is that (4 marks) P(0)

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