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Consider an economy with two states and four assets. The prices and payoffs of the assets are as follows. Assume that the law of one
Consider an economy with two states and four assets. The prices and payoffs of the assets are as follows. Assume that the law of one price holds. Asset Price Payoff in state 1 Payoff in state 2 1 1.00 1.20 0.84 2 0.09 0.20 0 3 ? 0.60 0.42 4 ? 1.00 1.00 (a) Compute the price of asset 3. [0.5 points] (b) Can you create a portfolio of only assets 1 and 2 that match the payoffs of asset 4? If yes, how many units of each asset do you need? If not, explain why not? [0.5 points) (c) Can you create a portfolio of only assets 1 and 3 that match the payoffs of asset 4? If yes, how many units of each asset do you need? If not, explain why not? [0.5 points]
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