Suppose we are in a world with two equally likely states u and d. And suppose the net returns of the three stocks are given by table 2.

(a) Let r_A and r_C be the net returns of stocks A and C respectively. Can you nd a random variable z such that r_A = r_C + z and E[z] = 0?

(b) Can you nd a risk-averse investor who prefers stock A (or B) to stock C?

u Stock A B d 10% 20% 20% 10% 15% 15% Table 2: The net returns of the stocks. u Stock A B d 10% 20% 20% 10% 15% 15% Table 2: The net returns of the stocks