Two securities have the following current prices and payoffs in two equally likely states of nature...

 

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Two securities have the following current prices and payoffs in two equally likely states of nature at the end of the year: Payoff Security A B 3 30 Stage 1 20 3 Stage 2 Current Price 10 12 a) Answer the following: i. What is the one-period risk-free interest rate? Show all the details of your calculation, explain intermediate results, and show your results with 4 decimal places. ii. Suppose now that there are three states of nature and two securities. Discuss the possibility of finding a risk-free portfolio in this scenario. b) Analysts expect Tinstagram will be worth £115 per share in one year from now and that it will not distribute any dividends. The risk-free rate is 8% p.a., the expected return on the market is 27%, and the beta of Tinstagram is 3. According to the CAPM, what should the current price of one share of Tinstagram be today? Show all the details of your calculation, explain intermediate results, and show your results with 4 decimal places. c) Suppose there is an asset with a negative beta available in the market. Based on the CAPM, answer the following questions: i. Should the return on this asset be higher or lower than the risk-free rate? Justify d) Explain in detail under which circumstances, if any, a portfolio manager may invest in this asset. Two securities have the following current prices and payoffs in two equally likely states of nature at the end of the year: Payoff Security A B 3 30 Stage 1 20 3 Stage 2 Current Price 10 12 a) Answer the following: i. What is the one-period risk-free interest rate? Show all the details of your calculation, explain intermediate results, and show your results with 4 decimal places. ii. Suppose now that there are three states of nature and two securities. Discuss the possibility of finding a risk-free portfolio in this scenario. b) Analysts expect Tinstagram will be worth £115 per share in one year from now and that it will not distribute any dividends. The risk-free rate is 8% p.a., the expected return on the market is 27%, and the beta of Tinstagram is 3. According to the CAPM, what should the current price of one share of Tinstagram be today? Show all the details of your calculation, explain intermediate results, and show your results with 4 decimal places. c) Suppose there is an asset with a negative beta available in the market. Based on the CAPM, answer the following questions: i. Should the return on this asset be higher or lower than the risk-free rate? Justify d) Explain in detail under which circumstances, if any, a portfolio manager may invest in this asset.

Answer rating: 100% (QA)

a i To calculate the oneperiod riskfree interest rate we can use the formula 1 r 1 r1 p1 1 r2 p2 Where r riskfree interest rate r1 return in state 1 r2 return in state 2 p1 probability of state 1 p2 p... View the full answer