Determine the risk free rate in this economy

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Question - Consider an economy with three assets and two dates (t = 0, 1) and three states at t = 1.

Let X = [1, 2, 3; 2, 1, 4; 1, 3, 1] (a 3x3 matrix) and p = [1.4; 1.8; 1.2] (a 3x1 matrix)

Be the matrix of asset payoffs at t = 1 and p the vector of asset prices at t = 0.

(a) Does an arbitrage portfolio exist?

(b) Can you create a portfolio with payoff of (70, 140, 130) at t = 1 and what is the t = 0 price of such a portfolio?

Reference no: EM132179222

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