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2. Assume that there are no arbitrage opportunities in the following financial market. State 1 State 2 Price Asset 1 Asset 2 1 3 1

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2. Assume that there are no arbitrage opportunities in the following financial market. State 1 State 2 Price Asset 1 Asset 2 1 3 1 0.4 1 0.5 a) Construct a portfolio of assets 1 and 2 that replicates the payoffs of A-D security 1. b) Construct a portfolio of assets 1 and 2 that replicates the payoffs of A-D security 2. c) What are the state prices for states 1 and 2? d) What is the riskfree rate interest rate)? 2. Assume that there are no arbitrage opportunities in the following financial market. State 1 State 2 Price Asset 1 Asset 2 1 3 1 0.4 1 0.5 a) Construct a portfolio of assets 1 and 2 that replicates the payoffs of A-D security 1. b) Construct a portfolio of assets 1 and 2 that replicates the payoffs of A-D security 2. c) What are the state prices for states 1 and 2? d) What is the riskfree rate interest rate)

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