What is the risk free interest rate in this economy

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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

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?

Reference no: EM131867907

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