Question 3 Consider the CCAPM model and the following equation for the price of an asset in equilibrium: Pt = C(Mt+1, 2++1) + 1 1+R E (2+1), where pt is the price of the asset at time t; (t+1 is the payoff of the asset at time t+1; R, indicates the return on the risk-free asset; mt+1 is the stochastic discount factor; and Et and Ct denote the conditional expectation and the conditional covariance given time-t information, respectively. Which of the following is true? A) The asset sells at a discount and the covariance term in the equation above is negative B) The asset sells at a discount and the covariance term in the equation above is negative if the asset gives a high payoff when consumption is low C) The asset sells at a discount and the covariance term in the equation above is negative if the asset gives a high payoff when consumption is high D) The asset sells at a discount and the covariance term in the equation above is positive if the asset gives a high payoff when consumption is high Question 4 We want to estimate the probability that a market index will go up in the next week. As a first attempt, we collect a large sample of weekly data on the index ro, r1, 12, ..., rt and we record 24 = 1 if rt-rt-1 > 0 and 21 = 0 otherwise. Assume that it is reasonable to think of this sample as an IID sample. Using our sample 11, X2, ..., IT, we estimate the probability that the index goes up using a sample proportion: p= T t=1 We know that the variance of p is VD=p(1 - p)/T. A reasonable estimator for this variance is VO P(1 - T = Choose the best answer: A) V is consistent and unbiased for VO B) VD is consistent but not unbiased for VO C) V is not consistent (since it goes to zero) but is unbiased for VO D) VP is neither consistent (since it goes to zero) nor unbiased for VO