(f) What are the risk neutral probabilities RN 1 and RN 2 ?

(g) Using the risk neutral probabilities solve for q s1 and q s2

(h) Is RN 1 greater than or less than the true probability 1? Why?

There is one period. Assume a representative agent with utility function U(ct) = 1 exp(nct). In parts b) through h) assume the following: n = .01. Consumption at t = 0 is Co = 25. At t = 1 one of two states and 2 eventuate with probability # = .5, and 7 = .5, respectively. There are two complex securities s and s. s has a payoff of 23 in 0 and 27 in 02. s has a payoff of 21 in 0 and 31 in 02. There is one period. Assume a representative agent with utility function U(ct) = 1 exp(nct). In parts b) through h) assume the following: n = .01. Consumption at t = 0 is Co = 25. At t = 1 one of two states and 2 eventuate with probability # = .5, and 7 = .5, respectively. There are two complex securities s and s. s has a payoff of 23 in 0 and 27 in 02. s has a payoff of 21 in 0 and 31 in 02