A.1. The table here shows the no-arbitrage prices of securities A and B that we calculated. Cash Flow in One Year Market Price Today Security Security A Security B Weak Economy Strong Economy 231 600 346 600 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 pertfolio? What expected return will you earn from holding CSCSmarker price of this portfolio? What expected return will you earn from holding this portrli A.2. Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy is strong. The risk-free interest rate is 4%. a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1? b. What is the no-arbitrage price of security C? c. What is the expected return of security C if both states are equally likely? What is its risk premium? d. What is the difference between the return of security C when the economy is strong and CS bamoeaner AHo| e. If security C had a risk premium of 10%, what arbitrage opportunity would be available? 1t
A.1. The table here shows the no-arbitrage prices of securities A and B that we calculated. Cash Flow in One Year Market Price Today Security Security A Security B Weak Economy Strong Economy 231 600 346 600 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 pertfolio? What expected return will you earn from holding CSCSmarker price of this portfolio? What expected return will you earn from holding this portrli A.2. Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy is strong. The risk-free interest rate is 4%. a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1? b. What is the no-arbitrage price of security C? c. What is the expected return of security C if both states are equally likely? What is its risk premium? d. What is the difference between the return of security C when the economy is strong and CS bamoeaner AHo| e. If security C had a risk premium of 10%, what arbitrage opportunity would be available? 1t
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Two question is connected So I attached together
But the question I want to solve is A.2!
I'm wondering the answer and the way to solve this problem A.2!
Transcribed Image Text:A.1. The table here shows the no-arbitrage prices of securities A and B that we calculated.
Cash Flow in One Year
Market Price Today
Security
Security A
Security B
Weak Economy
Strong Economy
231
600
346
600
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 pertfolio? What expected return will you earn from holding
CSCSmarker price of this portfolio? What expected return will you earn from holding
this portrli
Transcribed Image Text:A.2. Suppose security C has a payoff of $600 when the economy is weak and $1800 when the
economy
is
strong.
The risk-free interest rate is 4%.
a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1?
b. What is the no-arbitrage price of security C?
c. What is the expected return of security C if both states are equally likely? What is its risk
premium?
d. What is the difference between the return of security C when the economy is strong and
CS bamoeaner AHo|
e. If security C had a risk premium of 10%, what arbitrage opportunity would be available?
1t
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