Suppose that the processes for S1 and S2 are given by these two equations dS 1 1 S 1 dt 1 S 1 dZ 1 dS 2 2 S 2 dt 2 S 2 dZ 2 The diffusions dZ 1 and dZ 2 are different In this problem we want to find the expected return on Q, Q , where Q follows the process dQ Q Qdt Q 1 dZ 1 2 dZ 2 Show that, to avo...

As discussed in the hint consider a strategy of 1 unit in Q Q i S i i for bo ...

Suppose that the processes for S1 and S2 are given by these two equations: dS 1 =

Question:

Suppose that the processes for S1 and S2 are given by these two equations:

dS₁= α₁S₁dt + σ₁S₁dZ₁

dS₂ = α₂S₂dt + σ₂S₂dZ₂

The diffusions dZ₁ and dZ₂ are different. In this problem we want to find the expected return on Q, α_Q, where Q follows the process

dQ = α_QQdt + Qη₁dZ₁+ η₂dZ₂

Show that, to avoid arbitrage,

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...