Financial Markets – Fall, 2019 – Oct 3, 2019
S1 S2 S3 State 1 – Great Economy Economy Now State 2 – Average Economy State 3 – Financial & Economic Collapse
How does each asset perform in each state? An Asset (Security) Is Defined Only By its “Payoff” in Each State
X1 X2 X3 s1 s2 s3 Definition of Securities p1,1 p1,1 p1,2 p1,3 p2,3 November 1, 2018
Riskless Assets in a Finite State World Return $P State 1 – Economy gets better Xi $P State 2 – Economy gets worse $P State 3 – Economy muddles along November 1, 2018
The End