Unformatted text preview: 3. Use contingent claims prices to verify that your derivation for the price of trees is correct. 4. Using the contingent claim prices, obtain the price of a riskless bond ²an asset that yields one unit of consumption the following period come what may. 5. Compute the average rate of return on bonds and trees. For riskless bonds, the return obviously is R whereas on equities (share of trees) the average return is the expected return E ( R e t ) = E t n p t +1 + d t +1 p t o . What is the equity premium ( E ( R e t ) & R t ) for this economy? 1 Due to Rajesh Singh. 1...
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- Probability theory, contingent claims, Rajesh Singh, Prof. Lutz Hendricks, Lucas trees1