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Use the table to answer the following question. Market Price Cash Flow in One Year Security Today Poor Economy Good Economy A 200 840 0
Use the table to answer the following question. Market Price Cash Flow in One Year Security Today Poor Economy Good Economy A 200 840 0 B 600 0 840 C ??? 840 4200 a) Suppose there are two securities A and B. What is the risk free interest rate in this economy? b) Suppose there is the third security C whose risk premium is 30%. Its payoff is given as above. Assume that the probability of poor economy is 0.5 and that of good economy is 0.5. Is there an arbitrage opportunity in this economy?
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