Asset Pricing Playground

Probabilities must sum up to

one

Five different states of our Economy

State 1
State 2
State 3
State 4
State 5

state probability
payoff x of a given asset
consumption growth in % c(t+1)/c(t)
10%
100
2%
1.02
30%
20
-3%
0.97
20%
10
3%
1.03
30%
30
-8%
0.92
10%
100
5%
1.05

Parameters
Subjective discount rate Beta
Gamma

0.95
1

Calculations
E(m)
Cov(m,x)
E(x)
Standard dev of m

0.972
-0.576
37.000
0.047

Price of asset

p = E(mx) =

E(x)
+ cov(m, x)
Rf

1.029

Variance of m

0.002

35.38

E (R) =

Risk-free rate

xs p

E ( x)
p

Expected return revisited: Another, similar possibility to calculate E(R)

Return
State 1
2.827
State 2
0.565
State 3
0.283 E(Return)
State 4
0.848
State 5
2.827

1.046

Mean-Variance Frontier
Slope of mean-variance frontier
Risk
Return
10 Risk-free Rate + slope*10
0 Risk-free Rate
10 Risk-free Rate - slope*10

0.048586741
1.52
1.03
0.54

s (m )
E (m )

E(R)

Mean-Variance-Frontier

1.30

1.20
1.10
1.00
0.90
0.80
0.70
0

10 s(R)

c
m = b t +1
ct

-g

StochasticDiscount
factor m equal to
m.r.s.
0.931372549
0.979381443
0.922330097
1.032608696
0.904761905

E(m*x) 35.38
E(m*m) 0.95
m (trans.) 0.93 0.98 0.92 1.03 0.90
x (trans.) 100 20 10 30 100

Return (trans)

s (m )
E (m )

2.83 0.57 0.28 0.85 2.83