There are two states of nature (s1, s2) with equal probabilities

| November 24, 2016

I need the following with step by step calculations:

There are two states of nature (s1, s2) with equal probabilities. Suppose there is a representative agent who is endowed with 1 unit of consumption today, and (2, 1) tomorrow. The agent has power utility

a) What are the risk-neutral probabilities?

b) What is the gross return (Rf) of the riskfree bond?

c) What is the expected gross return of the security with payoff (1,0)? Is the expected risk premium (also known as the risk correction) of this security positive or negative? Please explain intuitively.

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