Q$1.$

Security Market Price Today Cash Flow in One Year

Weak Economy Strong Economy

A $2250600$

B $3506000$

C $?6001800$

a$)$ What are the payoffs of a portfolio of one share of security A and one share of security B$?$

b$)$ What is the market price of this portfolio? What is the risk$-$free rate?

c$)$ What is the no$-$arbitrage price of security C$?$

$($Hint: replicate the payoffs using security A & security B$)$

d$)$ What is the expected return of security C if both states are equally likely? What is its risk premium?