1. The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year. Security A B Market Price Today 231 346 Cash Flow in One Year Strong Economy Weak economy 0 600 600 0 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this portfolio? What expected rate of return will you earn from holding this portfolio? c. What is the risk-free interest rate?
1. The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year. Security A B Market Price Today 231 346 Cash Flow in One Year Strong Economy Weak economy 0 600 600 0 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this portfolio? What expected rate of return will you earn from holding this portfolio? c. What is the risk-free interest rate?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 13P
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