At time 0 the value of a risk-free bond is bo100 and the

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AT TIME 0 , the value of a risk-free bond is Bo=100, and the stock price is So=100. Suppose the annual risk-free interest rate is r=5%, and the one-year return on stock is Rs= 10% with probability 60% and -5% with probability 40%. Find positions x and y so that the Wealth, Wt=S*x + y*B of the portfolio (x,y) at thime t=T is $1000 if the stock price goes up and $1500 if the stock price goes down. What is the expected return of the portfolio over the first year?

Reference no: EM13586192

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