Question: Assume that the market index is 100 Show that if
Assume that the market index is 100. Show that if the expected return on the market is 15%, the dividend yield is zero, and volatility is 20%, then the probability of the index falling below 95 over a 1-day horizon is approximately 0.0000004.
Answer to relevant QuestionsSuppose that on any given day the annualized continuously compounded stock return has a volatility of either 15%, with a probability of 80%, or 30%, with a probability of 20%. This is a mixture of normals model. Simulate the ...Suppose that S and Q follow equations (20.36) and (20.37). Derive the value of a claim paying S(T )aQ(T )b by each of the following methods: a. Compute the expected value of the claim and discounting at an appropriate rate. ...Suppose S(0) = $100, r = 0.06, σS = 0.4, and δ = 0. Use equation (20.32) to compute prices for claims that pay the following: a. S2 b.√S c. S−2 Compare your answers to the answers you obtained to Problem 19.6. An agricultural producer wishes to insure the value of a crop. Let Q represent the quantity of production in bushels and S the price of a bushel. The insurance payoff is therefore Q(T ) × V [S(T ), T ], where V is the price ...Let c be consumption. Under what conditions on the parameters λ0 and λ1 could the following functions serve as utility functions for a risk-averse investor? (Remember that marginal utility must be positive and the function ...
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