Question 2 [10 points ] An investment company offers put options on a stock with exercise date t=1. (a) Draw the payoff (at t=1) of a portfolio that consists of the following two put options : Buy a put with exercise price E=$10 Sell aput with exercise price E=$20 as a function ofthe underlying stock price at t=1. [3p] Suppose the (t=0) prices of these puts are as follows : Price E=$10 $3.00 E=$20 $2.00 (b) Is there an arbitrage ? If so, nd a protable trading strategy .[4p] The investment company adds one more option to the above portfolio (c) Draw the payoff (at t=1) of a portfolio that consists of the following three put options : Buy a put with exercise price E=$4 Buy a put with exercise price E=$10 Sell aput with exercise price E=$20 as a function ofthe underlying stock price at t=1. [31)] Question 3 [12 points ] Consider an economy with two states which occur with equal probability .Suppose the CAPM holds .The risk 'ee rate is 2%. The market portfolio has an expected return of 12% and generates the state dependent payoff (100 , 200 ) at t=1. There are two assets .Asset A generates the state dependent payoff (10,40 )at t=1. Asset B generates the state dependent payoff (30,20 )at t=1. (a) Determine the beta of each of the assets ? [4p] (b) Suppose an investor has mean variance (CAPM ) preference and can either choose asset A or asset B for free . Which asset should he choose ? [6p] (c) What is the maximum price the investor is willing to pay for the chosen asset? [2p]