We consider a market model, where the prices of the risk-free and risky assets are denoted by
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Question:
We consider a market model, where the prices of the risk-free and risky assets are denoted by A(t) and S(t), respectively. Assume that A(0) = 100, A(1) = 110, S(0) = 10 dollars, and
S(1) = 12 with probability 1/2
11 with probability 1/4
10 with probability 1/4
(a) Is the model arbitrage free? If not, give an arbitrage opportunity.
(b) Find all portfolios (x, y) with positive initial capital and 11% expected return, where x and y denote the units of the risky and risk-free assets, respectively.
(c) Calculate σV /σS for the portfolios found in (b), where σV is the risk of such a portfolio and σS is the risk of the risky asset.
Related Book For
Business research methods
ISBN: 978-1439080672
8th Edition
Authors: William G Zikmund , Barry J. Babin, Jon C. Carr, Mitch Griff
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