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Consider two possible investment plans: (i) Invest $1 in asset A and cash it next period; (ii) Invest $1 in asset B and earn

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Consider two possible investment plans: (i) Invest $1 in asset A and cash it next period; (ii) Invest $1 in asset B and earn
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Answer #1

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No arbitrage condition implies that both alternatives provide same expected return such that there is no gain from moving from one another among the alternatives.

Return from (i) = 1 - 1 = 0

Return from (ii) = 1 + r - 1 = r

No arbitrage condition:

r = 0.

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