There are two possible states of the world next year: state 1 and 2. There are two assets that are traded in the market: asset A and B.

Information about the payoffs and prices of these assets is presented in the following table.

Asset State 1 Payoff State 2 Payoff Market Price

Asset A 2.0 0.9 1.3

Asset B 1.0 2.1 1.7

The two states of the world are equally likely. For now, assume that both assets are traded without any restrictions.

(a) What are the state prices for State 1 and State 2?

(b) There is another asset traded in the market: asset C, which pays off $7.0 in state 1 and $5.5 in state 2. What is the price of asset C?

(c) What is the risk-free interest rate in the market?