Hello, could you please help me in understanding and solving question 1 & 2. I am not really sure what the question 1 or 2 is asking me and I would really like to understand the concepts in solving questions like this. Thanks!

Homework Project 2: Arbitrage Spring 2017 MGT 3084 Deadline Tuesday, February 21, at 1:00 p.m. Grade 40 points (4%) Statement There are K = 3 states and N = 5 securities with the following future (terminal) payoff matrix, D , and (current) price vector, p : D= 2 0 0 4 3 0 8 0 4 5 0 0 3 4 6 , p= p1 2 1 p4 p5 (1) 1. Market Completeness: The payoff matrix and the price vector constitute a simple model of a (frictionless) market. (a) Search for a definition for \"market completeness\" that would suit this setup best, and report it. (b) Based on the definition, explain whether the market is complete. 2. State Prices, (z1 , z2 , z3 ): (a) Compute the state prices. (b) Under what conditions on p1 , p4 , and p5 there is no arbitrage? 3. Risk Neutral Probabilities, (q1 , q2 , q3 ): Suppose p1 = 12 . (a) Compute the risk free rate of return, rf . (b) Compute the risk neutral probabilities. (c) Compute the no-arbitrage prices p4 and p5 . 4. Change of Probability Measure (i ) and Stochastic Required Rate of Returns, (ri ): Suppose the actual (physical) probabilities are 1 = 11 , 2 40 = 13 , 3 40 = 16 . 40 (a) Compute the change of probability measure, i , i = 1, . . . , 3. (b) Compute the stochastic required rate of return vector ri , i = 1, . . . , 3 (inverse of stochastic discount factor vector). (c) Give an economic interpretation for each of the three states. 1 Outputs Each group turns in a report and a presentation: Report A pdf file (with the format \"Gn HWP1 Report.pdf\