Unformatted text preview: (b) Calculate the implicit (martingale) probabilities, the implicit discount factor and the implicit riskfree rate associated with these state prices. (c) Show that there exist other state prices compatible with the given information and the absence of arbitrage opportunities. Given an example. (d) Together with the given information, suppose that a portfolio is formed by selling 6 units of asset A and buying 10 units of asset B . Is this an arbitrage portfolio? Is the portfolio consistent with the absence of arbitrage opportunities? 4. Explain and assess the role of the arbitrage principle in the determination of asset prices. [Answers to this question require a knowledge of the material in EFM chapter 8, together with a general awareness of the role of arbitrage in ﬁnance.] *****...
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 Spring '11
 CRABBE
 Equilibrium, Pricing, Capital Asset Pricing Model, Austrian School, Rational pricing

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