The bank account contributes 110 in every state because it is a risk-free asset that pays 10% interest per year. Investing 100 today guarantees a return of 110 at time one, regardless of which of the three possible scenarios occurs.
Conditions: The bank account is risk-free.; The bank account pays 10% interest per year.; The initial investment (current price) is 100.; The model is a one-period setting with multiple states.
The bank account contributes 110 in every state because it is a risk-free asset that pays 10% interest per year. Investing 100 today guarantees a return of 110 at time one, regardless of which of the three possible scenarios occurs.
Conditions: The bank account is risk-free.; The bank account pays 10% interest per year.; The initial investment (current price) is 100.; The model is a one-period setting with multiple states.