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5. Consider an economy with complete markets. There are 3 states of nature (W1,w2,w3) and 3 Arrow securities. Specifically, at time 0 investors can buy
5. Consider an economy with complete markets. There are 3 states of nature (W1,w2,w3) and 3 Arrow securities. Specifically, at time 0 investors can buy these Arrow securities at the following prices: t=0 t=1 Price W1 W2 W3 pc(1) = 0.5 1 0 0 pc(2) = 0.1 0 1 0 pc(3) = 0.3 0 0 1 a) Consider a bond that offers the payoff 1 in any state of nature. What is the price of this bond? b) Consider a stock that offers the payoff 2 in state 1, 1 in state 2 and 4 in state 3. What is the price of this stock? c) What is the gross risk free return in this economy? d) What is the price of the risk free return in this economy? 5. Consider an economy with complete markets. There are 3 states of nature (W1,w2,w3) and 3 Arrow securities. Specifically, at time 0 investors can buy these Arrow securities at the following prices: t=0 t=1 Price W1 W2 W3 pc(1) = 0.5 1 0 0 pc(2) = 0.1 0 1 0 pc(3) = 0.3 0 0 1 a) Consider a bond that offers the payoff 1 in any state of nature. What is the price of this bond? b) Consider a stock that offers the payoff 2 in state 1, 1 in state 2 and 4 in state 3. What is the price of this stock? c) What is the gross risk free return in this economy? d) What is the price of the risk free return in this economy
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