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CHAPTER 10.
10.1 a) The CCAPM is an intertemporal model whereas the CAPM is a one-period model. The
b) The key contribution of the CCAPM resides in that the portfolio problem is indeed
inherently intertemporal. The link with the real side of the economy is also more apparent
c) The two models are equivalent in a one-period exchange economy since then aggregate
consumption and wealth is the same. More generally, the prescriptions of the two models
10.2. a) max(0,St +1()-p*)
b)
t1
t 1 t 1 t 1
1t1
1/c
S c c
1/c 1
c)
1t
t
1t c
c
pq
d) The price of the option is,
*
t t 1
'A
C q ' S ' p
10.3. a) (St +1()-p*)
b)
t1
t 1 t 1 t 1
1t1
1/c
S c c
1/c 1
c)
1t
t
1t c
c
pq
d) The price of the forward contract is,
*
t t 1 t 1
F q S p
.
10.4. a) After maximization, the pricing kernel from date 0 to date t takes the form
t
t
0
0
tm
c
c
.
Now the value of the wealth portfolio is
T
0t tt00 emEP
. At equilibrium we have
tt ce
.
Proportionality follows immediately from
T
0t tt
T
0t tt cmEemE
. With log utility we even
have
00 c
1
1
P
.
b) Let us first define the return on the wealth portfolio as
0
011
1P
PeP
r
~
. Inserting
011
c
1
1
cc
1
~
