Say there are three states of the world and three assets with returns summarized as follows:...
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Say there are three states of the world and three assets with returns summarized as follows: Asset 1 2 3 1 1 -1 State 1 20% 10% 25% State 2 0% 10% 5% State 3 -20% -5% -30% a. If there is no arbitrage, what must the risk-free rate be? b. Assume there is a risk-free asset with a rate higher than the value you calculated for part a). How would you take advantage of this arbitrage? Say there are three states of the world and three assets with returns summarized as follows: Asset 1 2 3 1 1 -1 State 1 20% 10% 25% State 2 0% 10% 5% State 3 -20% -5% -30% a. If there is no arbitrage, what must the risk-free rate be? b. Assume there is a risk-free asset with a rate higher than the value you calculated for part a). How would you take advantage of this arbitrage?
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a To determine the riskfree rate rf we can use the concept of noarbitrage in a riskneutral world In ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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