3) Assume agents solve the one period utility of consumption model from lecture #4, In terms of that model using the first order condition, explain why the stock market has a positive risk premium and gold has a negative risk premium. (This needs about 3 sentences and you need to explain in terms of the first order conditions)

4) Consider the Lucus Model, assume you are an individual utility maximizerHOW WOULD YOU KNOW you are in a bubble ?

5 consider an asset with the following characteristics: And, consider two derivative contracts C1(S,T) and C2(S,T). Write the equations that would need to be solved in order to set up a hedged portfolio. You do not need to solve them.

6. Why can there be no risk neutral pricing if the market is not complete (this is in your notes)?

7. If the interest rate is 3% and the volatility of the stock is 12% and it has six months to maturity What is the piece of a call with strike price 35 if the current stock price is 36?

8. Now assume there are two periods to maturity and the price can move and the stock price is still 36 and the exercise price is still 35. What is the option price? (7 and 8 are the same problem solved by two different models)

9. Let dx=.2dt+.1dz and let F(x,t)=3xt. Express dF as simply as possible.

10. Are the normal and the log normal distribuions equivalent?