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Question 3 Consider the Consumption CAPM model and the following equation for the price of an asset in equilibrium 1 pt = CVt (mt+1, 33134.1)
Question 3 Consider the Consumption CAPM model and the following equation for the price of an asset in equilibrium 1 pt = CVt (mt+1, 33134.1) 'l' 1 + Rf Et($t+1) (1) Where pt is the price of asset at time t; xt+1 is the payoff of the asset at time t + 1;, R f indicates the return on the riskfree asset; mt+1 is the stochastic discount factor; and E: and GIth denote the conditional expectation and covariance at time 15, respectively. Consider the following asset. When the investor's income is high, the asset gives negative re turns. When the investor's income is low or negative, the asset gives positive returns. A) The asset sells at a premium and the covariance term in the equation above is positive B) The asset sells at a discount and the covariance term in the equation above is positive C) The asset sells at a premium and the covariance term in the equation above is negative D) The asset sells at a discount and the covariance term in the equation above is negative
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