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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 an 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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This note was uploaded on 10/29/2009 for the course ECON 720 at UNC.