2. Given the price of bonds in the risk-free market as follows, A(0) = 100,A(1) =...
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2. Given the price of bonds in the risk-free market as follows, A(0) = 100,A(1) = 110,A(2) = 121 As well as stock prices in risky markets as follows: skenario S(0)| S(1)| S(2) 1 100 120 144 2 3 100 120 96 100 90 96 Define: a. Investor's initial wealth b. Draw the binomial tree t=1 c. Determine the investor's wealth at investor's strategy can be said to be an acceptable strategy. t=2 and, then determine whether the d. Determine the risk neutral probability for each scenario. (hint: use the risk neutral probability formula and assume that the probability of the price going up is p and the probability of the price going down is 9=1-P e. Determine the risk and expected return of the portfolio. 2. Given the price of bonds in the risk-free market as follows, A(0) = 100,A(1) = 110,A(2) = 121 As well as stock prices in risky markets as follows: skenario S(0)| S(1)| S(2) 1 100 120 144 2 3 100 120 96 100 90 96 Define: a. Investor's initial wealth b. Draw the binomial tree t=1 c. Determine the investor's wealth at investor's strategy can be said to be an acceptable strategy. t=2 and, then determine whether the d. Determine the risk neutral probability for each scenario. (hint: use the risk neutral probability formula and assume that the probability of the price going up is p and the probability of the price going down is 9=1-P e. Determine the risk and expected return of the portfolio.
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