clear all;
%pset1 problem3b

beta = 1.01^(-1);
sigma = 10;
epsilon = 0.01;

%price of stock
psB = 0.5*(beta/(1-beta))*(((1+epsilon)^(1-sigma) + (1-epsilon)^(1-sigma) )/(1+epsilon)^(-sigma))
psR = 0.5*(beta/(1-beta))*(((1+epsilon)^(1-sigma) + (1-epsilon)^(1-sigma) )/(1-epsilon)^(-sigma))

%return on stock in all realizations
rBB = (psB + (1+epsilon))/psB
rBR = (psR + (1-epsilon))/psB
rRB = (psB + (1+epsilon))/psR
rRR = (psR + (1-epsilon))/psR

%average return on stock
r = 0.25*(rBB + rBR + rRB + rRR)