The following table shows three securities (A, B, and C) tha…
The following table shows three securities (A, B, and C) that can be purchased today. Assume that one year from now, only two possible outcomes can occur: “State 1” and “State 2”. Security Market Price Payoff in State 1 Payoff in State 2 X $35 $25 $50 Y $30 $15 $60 Z $40 $19 $56 Consider these two investments: Investment 1: Invest 40% in Security X and 60% in Security Y Investment 2: Invest everything in Security Z Explain whether there is an arbitrary opportunity available. Hint: Determine the cost of the two investments and look at the payoff of both investments in the two states.