Use the table to answer the following question.
Market Price Cash Flow in One Year
Security Today Poor Economy Good Economy
A 200 840 0
B 600 0 840
C 840 4200
a) Suppose there are two securities A and B. What is the risk free interest rate in this economy?
b) Suppose there is the third security C whose risk premium is 30%. Its payoff is given as above. Assume that the probability of poor economy is 0.5 and that of good economy is 0.5. Is there an arbitrage opportunity in this economy?