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Suppose that in an Arrow-Debreu economy, there is a representative agent whose utility function is u(c)=ln(c). The subjective discount factor is =0.99, and the date-
Suppose that in an Arrow-Debreu economy, there is a representative agent whose utility function is u(c)=ln(c). The subjective discount factor is =0.99, and the date- 0 consumption is c0=1. There are two states in the next period (date-1), with probabilities being 0.7 and 0.3 respectively. The table below shows the optimal consumption plan in date-1 and the payoff of an asset. Suppose the price of the asset is 1.6. Which one of the following statements about the asset's risk premium is correct? The risk premium implied by the given price is approximately 0.1; however, the risk premium calculated from the no-arbitrage pricing equation in A.the Arrow-Debreu model is approximately 0.028. Thus, the asset is under-valued. The risk premium implied by the given price is approximately 0.08; however, the risk premium calculated from the no-arbitrage pricing equation .in the Arrow-Debreu model is approximately 0.01. Thus, the asset is under-valued. The risk premium implied by the given price is approximately 0.1; however, the risk premium calculated from the no-arbitrage pricing equation in o c.the Arrow-Debreu model is approximately 0.028. Thus, the asset is over-valued. The risk premium implied by the given price is approximately 0.08; however, the risk premium calculated from the no-arbitrage pricing equation o o.in the Arrow-Debreu model is approximately 0.01. Thus, the asset is over-valued
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