Suppose there are three states of nature and three traded assets with the following payoffs

Subject:ManagementPrice: Bought3

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Suppose there are three states of nature and three traded assets with the following payoffs. Each column represents an asset and each row represents a state of nature. 

 

1 0 2 2

payoff= 2 1 2 price= 1.5

3 1 1 1.4

 

 I             Find out the risk free interest rate. Hint: First figure out the replication portfolio for risk free asset.

 

II            Given the current information please find out the price of the following three assets.

1 0 0

payoff= 0 1 0

0 0 1

 

III           Based on question II, what is the price of the following asset?

 

  3

payoff= 0

2

 

Iv           Is the market in equilibrium? Are there any arbitrage opportunities? 

 

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