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The price in one year of risky asset, Stock A, currently sold at 100, will depend on the state of the world. State boom and
The price in one year of risky asset, Stock A, currently sold at 100, will depend on the state of the world. State boom and state recession are equally likely (probability 0.5) and Stock A will be sold at 120 in a boom and at 100 in a recession. The annual risk-free rate for bank deposits and loans in the economy is 5%. An investment bank offers a product called "Better than A", with the following characteristics: Investment today - 220 Payoff in one year - 320 in a boom, 200 in a recession Is this a good investment? What is the maximum fair price for the payoff profile of "Better than A
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