Question 1 Consider the CCAPM model and the following equation for the price of an asset in equilibrium: 1 Pt = C: (mt+1, xt+1) + -E (x+1), 1+Rf where pt is the price of the asset at time t; xt+1 is the payoff of the asset at time t+1; Rf indicates the return on the risk-free asset; m+1 is the stochastic discount factor; and E, and C; denote the conditional expectation and the conditional covariance given time-t information, respectively. Which of the following is true? A) The asset sells at a premium and the covariance term in the equation above is positive B) The asset sells at a premium and the covariance term in the equation above is positive if the asset gives a high payoff when consumption is low C) The asset sells at a premium and the covariance term in the equation above is positive if the asset gives a high payoff when consumption is high D) The asset sells at a premium and the covariance term in the equation above is negative if the asset gives a high payoff when consumption is low

MATLAB: An Introduction with Applications
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Author:Amos Gilat
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Question 1
Consider the CCAPM model and the following equation for the price of an asset in equilibrium:
1
C: (mi+1, Tt+1) +
-E: (x+1),
1+Rf
Pt =
is the price of the asset at time t; x++1 is the payoff of the asset at time t+1; Rf indicates
the return on the risk-free asset; m+1 is the stochastic discount factor; and E, and C; denote the
conditional expectation and the conditional covariance given time-t information, respectively.
where
Pt
Which of the following is true?
A) The asset sells at a premium and the covariance term in the equation above is positive
B) The asset sells at a premium and the covariance term in the equation above is positive if the
asset gives a high payoff when consumption is low
C) The asset sells at a premium and the covariance term in the equation above is positive if th
asset gives a high payoff when consumption is high
D) The asset sells at a premium and the covariance term in the equation above is negative if the
asset gives a high payoff when consumption is low
Transcribed Image Text:Question 1 Consider the CCAPM model and the following equation for the price of an asset in equilibrium: 1 C: (mi+1, Tt+1) + -E: (x+1), 1+Rf Pt = is the price of the asset at time t; x++1 is the payoff of the asset at time t+1; Rf indicates the return on the risk-free asset; m+1 is the stochastic discount factor; and E, and C; denote the conditional expectation and the conditional covariance given time-t information, respectively. where Pt Which of the following is true? A) The asset sells at a premium and the covariance term in the equation above is positive B) The asset sells at a premium and the covariance term in the equation above is positive if the asset gives a high payoff when consumption is low C) The asset sells at a premium and the covariance term in the equation above is positive if th asset gives a high payoff when consumption is high D) The asset sells at a premium and the covariance term in the equation above is negative if the asset gives a high payoff when consumption is low
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