Suppose that in a two-period Arrow-Debreu economy with three states, the state probabilities are 7₁ = 0.1, 7₂ = 0.55, 73=0.35 and the state prices are 9₁ = 0.2, 9₂=0.5, 93 = 0.8 for states 1, 2, and 3 respectively. Assume that an asset has the state-contingent dividend given in the following table, and the observed price of the asset is 4.1. State-contingent dividend State 2 State 3 Asset's dividend 3 2 According to information above, which one of the following statements regarding arbitrage opportunities is correct? State 1 5 OA. In this case, arbitrage opportunities do not exist. OB. In this case, arbitrage opportunities exist because the asset is over-priced.

Suppose that in a two-period Arrow-Debreu economy with three states, the state probabilities are 7₁ = 0.1, 7₂ = 0.55, 73=0.35 and the state prices are 9₁ = 0.2, 9₂=0.5, 93 = 0.8 for states 1, 2, and 3 respectively. Assume that an asset has the state-contingent dividend given in the following table, and the observed price of the asset is 4.1. State-contingent dividend State 2 State 3 Asset's dividend 3 2 According to information above, which one of the following statements regarding arbitrage opportunities is correct? State 1 5 OA. In this case, arbitrage opportunities do not exist. OB. In this case, arbitrage opportunities exist because the asset is over-priced.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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