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Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Price PA=2 PB=3 Security Payoff State 1 State 2 A B 4 3 2 4 a. Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.
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