According to the C-CAPM, the equilibrium price of an asset is: 1110:\") i" = Et Ewes] cl" Assume that the utility function is given by 11(6) 2 and the time preference )3 = 0.9. l- r Suppose the following economic environment: your current consumption C1 = 1 and future consumption a; =1.5 or 0.5 depending on the state of the economy, as below: Good state (51): c2 = 1.5 Probability = 0.4 Bad state (52): C2 = 0.5 Probability = 0.6 (a) Outline the concept of relative risk aversion in the C-CAPM. How is it related to the elasticity of intertemporal substitution? Determine the elasticity. (5 marks) (b) Assume there is a discount bond that guarantees a payoff of 1 unit in period 2. Find the price p and the return r on this bond. To answer this question, assume that y = 1, Le. the utility is log of consumption. (5 marks) Now assume instead that there is a stock with a payoff of 1.5 allowing you to consume :2 = 1.5 in the good state (51) and with a payoff of 0.5 allowing you to consume a; = 0.5 in the bad state (52), so that your consumption is entirely derived from this asset. That is, this asset is perfectly correlated with the state of the economy. Now answer the questions (c) and (d) below. (c) Find the price of the stock 5 and the expected return F on the stock. (10 marks) (d) Calculate the equity risk premium for the stock and outline all factors that determine the equity risk premium in the C-CAPM. (5 marks) (e) What is the C-CAPM beta? Provide a short interpretation of this beta? How is it different from the CAPM beta