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Compute the price of a risk-free bond

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Consider a situation in which there are five states, and suppose you can observe the prices of the Arrow securities. They are (0.1225, 0.2451, 0.3676, 0.0613, 0.1838).

(a) Compute the price of a risk-free bond and the risk-free rate of return.

(b) What are the risk-neutral probabilities of the five states?

(c) How much does a hypothetical asset cost with cash flow (5, 5, 2, 7, 4)?

Reference no: EM131857081

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