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Consider a two period economy with a risk free asset yielding a net return r>0 in period 2 and an infinitely large number of risky

  1. Consider a two period economy with a risk free asset yielding a net return r>0 in period 2 and an infinitely large number of risky assets each paying 1 pounds with probability p and 0 pounds with probability 1-p in period 2. Suppose that the realized return of each asset is independent of the return of the other assets, that investors are risk averse, and that the CAPM holds. Then,
  1. All risky assets have the same price equal to p/(1+r)
  2. Each risky asset is priced as to yield an expected gross return than 1+r
  3. The price of any risky asset in the first period is larger than P/(1+rto reflect investors risk aversion D. The price of any risky asset in the first period is larger than P/(1+r) to reflect systemic risk

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