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Consider the binomial asset pricing world where at time t = 0, a share of stock costs S0 = 50. At time t = 1,
Consider the binomial asset pricing world where at time t = 0, a share of stock costs S0 = 50. At time t = 1, we flip a coin, and the stock is worth S1(H) = 100 or S1(T) = 50 if heads or tails occurs respectively. Assume the probability of heads is p = 1/2. If the risk-free interest rate is r = 0.1, what is the equity premium?
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