Solution-Determining the arbitrage opportunity

Determining the arbitrage opportunity

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Reference no: EM133062593

Suppose that the economy is described by three growth states: strong, moderate, and weak. The probabilities of strong, moderate, and weak growth states are 0.3, 0.5 and 0.2, respectively. Assume that the risk-free rate is 2%.

Consider a different distribution of returns:

	Strong Growth	Moderate Growth	Weak Growth
A	30%	10%	-10%
B	16.3%	-3.9%	5.3%
C	5.5%	-2.7%	18.5%

1. Is there an arbitrage opportunity? Explain your answer, and if the answer is "yes", describe in detail how you would take advantage of it.

Reference no: EM133062593

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Determining the arbitrage opportunity

Reference no: EM133062593

Reference no: EM133062593

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