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Suppose three equally likely outcomes could happen one year from now: good, medium, and bad. Security A pays $ 1 if the good outcome happens
Suppose three equally likely outcomes could happen one year from now: good, medium, and bad. Security A pays $ if the good outcome happens and $ otherwise. Security B pays $ if the medium outcome happens and $ otherwise. Security C pays $ if the bad outcome happens and $ otherwise.
Security A trades today for $;
Security B trades today for $;
Security C trades today for $
Using the Law of One Price, what is the riskfree rate?
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