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Information for Question 5 You observe the prices and payoffs of two assets: Payof fu = 1, Payof f21 = 0 P1 = 0.5 P1
Information for Question 5 You observe the prices and payoffs of two assets: Payof fu = 1, Payof f21 = 0 P1 = 0.5 P1 = 0.80, P2 = 0.70 P2 = 0.5 Payof f12 = 0, Payof f22 = 1 Here, P; denotes the price for one share of asset i, and Payof fis denotes the payoff of a share of asset i under scenario s. Question 5 With reference to the information provided above, and assuming that the Law of One Price holds, what should be the price of an asset that pays $100 in either scenario? Information for Question 5 You observe the prices and payoffs of two assets: Payof fu = 1, Payof f21 = 0 P1 = 0.5 P1 = 0.80, P2 = 0.70 P2 = 0.5 Payof f12 = 0, Payof f22 = 1 Here, P; denotes the price for one share of asset i, and Payof fis denotes the payoff of a share of asset i under scenario s. Question 5 With reference to the information provided above, and assuming that the Law of One Price holds, what should be the price of an asset that pays $100 in either scenario
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