DSE 2010

Posted by poonam on Jun 24, 2011; 11:11am
URL: http://discussion-forum.276.s1.nabble.com/DSE-2010-tp6511571.html

suppose there is only one future period with two states s1 or s2. Return on a company share is 5 in s1 and -1 in s2. Future return on a government bond is 1 independent of state. A third assets offers 3 in s1 and 0 in s2. price of stock =3 and price of bond=1. If the price of the new asset rules out the possibility of arbitrage, what is its price?

Please let me know how to do this question. Shouldn't the price depend on the probabilities of the future states ??