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Questions 1. Consider a world in which there are only two periods: period 0 and period 1 and three possible states of the world in period 1 (a good weather state, a fair weather state, and a bad weather state). Also, apples are the only product produced in this world, and they period to the next. The following abbreviations will be used: cannot be stored from one PA apple in the present period (i.e., present apple), GA = good weather apple in the next period, FA = fair weather apple in the next period, BA = bad weather apple in the next period Suppose that an produces 160 GA, 100 FA, and 50 BA. The bond pays 40 GA, 40 FA and 40 BA. The stock pays 120 GA, 60 FA and 10 BA. The price of the bond is 36 PA, and the price of the stock is 44 PA. In addition, security C, D, and E are traded for 62 PA, 22 PA, and 20 PA respectively. Security C pays 140 GA, 80 FA, and 30 BA. Security D pays 60 GA, 30 FA, and 5 BA. Security E pays 80 GA, 20 FA, and 0 BA apple tree firm offers for sale a bond and stock. The apple tree 1.1) Find the arbitrage-free price of the atomic securities. 1.2) Calculate the arbitrage-free price of an by the firm's securities. apple tree. Verify it equals the price implied 1.3) Calculate the discount factor and explain its economic interpretation. How is it related to the risk-free interest rate

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