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Refer to the following table: Assets Price State 1 Payoff State 2 Payoff A 3 2 4 B 7.5 6 9 C 9 8 10

Refer to the following table:

Assets

Price

State 1 Payoff

State 2 Payoff

A

3

2

4

B

7.5

6

9

C

9

8

10

D

15

12

21

PART A. Let a be the number of shares of Asset A, and let b be the number of shares of Asset B. Solve for the number of shares a and number of shares b which produces the same payoffs as Asset C.

a=

b=

PART B. Let a be the number of share of Asset A, and let b be the number of shares of Asset B. Solve for the number of shares a and number of shares b which produces the same payoffs as Asset D.

a=

b=

PART C. Which of the following trades produces a riskless profit? Select all that apply.

a. Buying 1 share of A and 3 shares of B and short selling 1 share of C and 1 share of D

b. Buying 4 shares of B and short selling 4 shares of A and 2 shares of C

c. Buying 8 shares of A and 1 share of C and short selling 2 shares of D

d. Buying 1 share of C and short selling 1 share of B and 1 share of A

e. None of the above

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