Suppose that the short rate r is 4% and its real-world process is while the risk-neutral process
Question:
Suppose that the short rate r is 4% and its real-world process is
while the risk-neutral process is
(a) What is the market price of interest rate risk?
(b) What is the expected return and volatility for a 5-year zero-coupon bond in the risk-neutral world?
(c) What is the expected return and volatility for a 5-year zero-coupon bond in the real world?
Expected ReturnThe 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...
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a The risk neutral process for r has a drift rate which is 0006 r higher than t...View the full answer
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