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5. Arbitrage Assume two states of the world and three assets: Asset B L Asset C Asset A 6 2 4 State 1 State 2

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5. Arbitrage Assume two states of the world and three assets: Asset B L Asset C Asset A 6 2 4 State 1 State 2 Price 8 1 4 P. 3 2 A. Suppose pc = 1. Does this price satisfy the no-arbitrage principle? Why or why not? (hint: what 2 conditions are required for an investor to earn riskless profits?) (10 pts) B. If the answer to (A) is no, what is the equilibrium price of pc? + 5. Arbitrage Assume two states of the world and three assets: Asset B L Asset C Asset A 6 2 4 State 1 State 2 Price 8 1 4 P. 3 2 A. Suppose pc = 1. Does this price satisfy the no-arbitrage principle? Why or why not? (hint: what 2 conditions are required for an investor to earn riskless profits?) (10 pts) B. If the answer to (A) is no, what is the equilibrium price of pc? +

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