Consider a capital market with two securities. The payoffs of these securities in thetwo equally likely states of the world are given in the table below.PayoffPriceSecurityAвState 1State 2PA = 2Pg = 34234a) Discuss the concepts of complete capital markets,pure (Arrow-Debreu)securities, and pure factor portfolios. Establish whether the capital market in thiscase is complete and determine the prices of the pure securities by arbitrage.

Financial instruments are the legal documents which have some monetary value. It can be either in…

Answered: a) Discuss the concepts of complete…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.