4. Below are the prices on PredictIt.org for bets about the winner of the French presi- dential election (as recorded in the afternoon of March 1, 2017). A "yes" bet on a candidate pays off $1 if the candidate wins, and zero otherwise. A "no" bet on a candidate pays off $1 if the candidate does not win the presidency, and zero otherwise. Note that you can only buy "yes" bets, or buy "no" bets (that is, you cannot sell bets that you don't own in financial market jargon, you cannot "go short") Ca Using these prices, construct a portfolio of bets that makes money with certainty. Hint: Note that the "yes" bets are too expensive buying all of them costs more than $1 This suggests that the "no" bets might be too cheap. b Tabulate the rate of return on your capital in each state of the world (that is, for all possibilities for the next French president). The rate of return is computed by dividing your total payoff divided by the total amount of money you invested to buy bets, and then subtract one. Are these higher than a bi-monthly interest rate of approximately 0.5%? (This comparison is useful because the election is on April 23, and buying the bets prevents you from getting the 0.5% interest for investing the money at a 3% yearly interest rate 4. Below are the prices on PredictIt.org for bets about the winner of the French presi- dential election (as recorded in the afternoon of March 1, 2017). A "yes" bet on a candidate pays off $1 if the candidate wins, and zero otherwise. A "no" bet on a candidate pays off $1 if the candidate does not win the presidency, and zero otherwise. Note that you can only buy "yes" bets, or buy "no" bets (that is, you cannot sell bets that you don't own in financial market jargon, you cannot "go short") Ca Using these prices, construct a portfolio of bets that makes money with certainty. Hint: Note that the "yes" bets are too expensive buying all of them costs more than $1 This suggests that the "no" bets might be too cheap. b Tabulate the rate of return on your capital in each state of the world (that is, for all possibilities for the next French president). The rate of return is computed by dividing your total payoff divided by the total amount of money you invested to buy bets, and then subtract one. Are these higher than a bi-monthly interest rate of approximately 0.5%? (This comparison is useful because the election is on April 23, and buying the bets prevents you from getting the 0.5% interest for investing the money at a 3% yearly interest rate
