Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 32 / 1 / b / i

The current price of one unit of certain future consumption is the sum of the Arrow state prices, namely $0.9$. A unit-price risk-free asset yielding gross return $R$ must satisfy $0.9R=1$. HenceNormalize the Arrow state prices by their sum, or multiply them by $R$, to obtain the risk-neutral probabilities:They are positive and sum to one. Any terminal payoff $Y$ has current price ${\sum }_s{p}_s{Y}_s=R^{-1}{\mathbb{E}}_{Q}Y$. In particular any asset with current price one has ${\mathbb{E}}_Q{r}_i=R$. These pricing probabilities need not equal the physical probabilities governing the investor's utility.