Please correct answer and don't use hand raiting Arbitrage11. (4pt) Today is t = 0, and assume that there are two possible states of the world in nextyear (t = 1), either s = good or s = bad. There are two risky assets (G and B) tradedat the same price p today. Their payoff in the next year depends on the realized statein the future, as specified in the following table.State(s)goodbadAsset G payoff Asset B payoff$1$0$0$1For example, asset G pays out $1 (per share) if the future state is good, while pays outnothing if the state is bad. You can also save/borrow at risk-free rate r = 8% and callthis opportunity the safe asset. Assuming that there is no risk other than uncertaintyabout s, there is no arbitrage between the risky assets and the safe asset if p =(a) $1.08(b) $1.00(c) $0.46(d) $0.54(e) $0.651. (5pt) Consider the same situation as Q11 above, while the payoff matrix has changedto the following table. When r = 8%, what is the arbitrage price p?State(s) Asset G payoff Asset B payoff(a) $1.00(b) $1.12(c) $1.30(d) $1.48(e) $1.88good$4bad$1$0$2

Question 11: In the Good state, the portfolio payoff should be: x * 1 + y * 0 = xIn the Bad state,…

Answered: Arbitrage 11. (4pt) Today is t = 0, and…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 4MC

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Consider a state space model. Suppose there are two economic states in the next year.The probability of occurrence of state 1 is 0.29 and the probability of occurrence of state 2 is 0.71. There is a risk-free bond traded in this market with the time 1 payoff of $100. The time 0 price of the bond is $89.71.All primitive state-contingent claims are traded in this market. (a) The time 0 price of the state-contingent claim paying off $1 in state 1 is. What is the price of, the state-contingent claim paying off $1 in state 2? (b) Suppose that there is another security traded in this market: a stock paying $50.0 in state 1, and $100.0 in state 2. What is the time 0 price of the stock? (c) What is the expected return on the risk-free bond (in %)? (d) What is the expected return on the stock? (e) What is the standard deviation of the return of the bond? (f) What is the standard deviation of the return of the stock?
Assume a finite state economy with three assets whose payoff matrix is given by 30 20 50 D = 20 15 35 (a) Suppose that the asset prices are $28, $18, and $47, respectively. Is there an arbitrage opportunity in the market? (b) If the price of the third asset reduces to $46, is there an arbitrage oppor- tunity in the market?
Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%
This is part a) question and it's answer in order to answer part b) question Question: You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? answer : According to the question we need to calculate the current price of the perpetual consol. Perpetual consoles are priced differently because their expected income is spread through an indefinite period. So, perpetual consoles are priced using the current yield. The current yield is calculated as:- coupon amountMarket price×100coupon amountMarket price×100 After calculating the current yield price is calculated by the above formula where, i = Current interest rate y = yield so, the price of this consol will be Price = i/y I please need the solutions for part b) question b) In the next period however, the interest rate changes unexpectedly to i . What is the new price of the bond? If…
9. The risk neutral probability is equal to 0.5 and the risk free rate is 4%. Furthermore the present value of cash flows is equal to V=90. If d = 1/u, then what is the value of Vin the downstate in the next period? Please round your answer to one decimal place and use a period to indicate the decimal place (e.g. 100.7 instead of 100,7). Enter answer here
9. The risk neutral probability is equal to 0.5 and the risk free rate is 4%. Furthermore the present value of cash flows is equal to V= 90. If d = 1/u, then what is the value of V in the downstate in the next period? Please round your answer to one decimal place and use a period to indicate the decimal place (e.g. 100.7 instead of 100,7).
How did they come up with the value 619,417 for PV of Benefits for the year 2015 using the formula that I have attached?
13. Consider the following possible returns over the next year on an asset Return probability –£40 0.5 £40 0.5 What is the expected monetary return of this asset over the next year?
H4.
Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Step 1 Security market line (SML) is a graphical representation of how the approach of the capital asset pricing model (CAPM) operates. SML represents the combination of risk-free return, market return, and beta to depict the expected return of the security. CAPM is a financial approach that helps to determine the expected return of security by creating a relationship between the systematic risk associated with the security and returns of assets. Expected return on a stock is the…
Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
1. Assume that you expect the economy's rate of inflation to be 3 percent, giving an RFR of 6 percent and a market return (RM) of 12 percent. a. Draw the SML under these assumptions. b. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent. What effect would this have on the RFR and the RM? Draw another SML on the graph from Part a. c. Draw an SML on the same graph to reflect an RFR of 9 percent and an RM of 17 percent. How does this SML differ from that derived in Part b? Explain what has transpired.

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