Question
Mr. BEn has initial wealth W0=$12,000 and faces an uncertain future that he partitions into three states, S=1, S=2, and S=3. He can invest in
Mr. BEn has initial wealth W0=$12,000 and faces an uncertain future that he partitions into three states, S=1, S=2, and S=3. He can invest in three securities, J, K, L, with initial prices of PJ=$5.2, PK=$4, and PL=$4, and the following payoffs table: Payoffs Security S=1 S=2 S=3 J $6 $2 $10 K L 1. 2. 3. 4. $8 $8 $0 $5 $5 $5 Form a portfolio (including securities J, K, and L) that can achieve the $15,680 following payoff structure( $1,680 ). Compute its price. Could Mr. $23,300 BEn buy this portfolio? Form all the pure securities using the traded assets. Find the price of pure securities and compute the risk free rate. YY is a new company considering offering their shares to the market. $1 Each YY stock will achieve the following payoffs($10). Are there any $25 arbitrage profits that can be realized if the offering price is $11? If yes, present the arbitrage strategy and its outcome.
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