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  3. (a) the basic pricing equation is central in asset

(a) The Basic Pricing Equation is central in asset pricing. However, in study- ing this...

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(a) The Basic Pricing Equation is central in asset pricing. However, in study- ing this key equation one is faced with the question - which is the chicken and which is the egg between asset returns and consumption? Using suit- able manipulations of the basic pricing equation below, argue whether it really matters to start with asset prices or consumption to determine the other. ' (@+1 U'(a) [8 marks) P = E 1+1

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