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Consider a one-period market with three states 1,2, and 3 , as well as three assets - stock A, stock B, and riskless bond C.

image text in transcribedimage text in transcribed Consider a one-period market with three states 1,2, and 3 , as well as three assets - stock A, stock B, and riskless bond C. In state 1 , the returns of stocks A and B are uA=1.2 and uB=1.1, respectively. In state 2 , the returns of stocks A and B are both 1 . In state 3 , the returns of stocks A and B are dA=0.7 and dB=0.9, respectively. The return of bond C is always 1+r. Suppose r=1%. What is a fair price of a security with payoff vector (2,1,0.5)

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