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What is the value of the SDF

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Question - Consider a single period economy which can enter into one of two possible states indexed by 1 and 2. Each of these states occurs with equal probability. In state 1, a risky asset will have a simple net return of 30% while in state 2 it has a return of -10%. There is also a risk-free asset with a simple net return of 5%.

1. What is the value of the SDF in state 2?

A. 0.714

B. 1.190

C. 0.914

D. 1.320

2. Which state is a bad state?

A. state 1

B. state 2

C. The two states are viewed equally by investors

D. Need more information

Reference no: EM132947024

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