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I've been solving many exercises with three assets that have two possible payoffs each, one payoff per possible future state. The question is always the same, i.e. is any asset redundant.

After setting a system of two equations with two unknowns, I always find some quantities of other two stocks, that make the third one redundant.

So why the question? Is it possible that we couldn't express one security with the other two?

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  • $\begingroup$ With 3 assets and 2 states there is always at least one asset redundant. Linear algebra tells you so. With N assets and M states it is a little more complicated... $\endgroup$ – Alex C Aug 29 at 14:55

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