What is risk-free rate of return that must exist in market

Assignment Help Financial Management

Reference no: EM131506765

Suppose that we can describe the world using two states and that two assets are available, asset K and asset L. We assume the assets’ future prices have the following distributions:

State Future Prices Asset K Future Prices Asset L

K at state 1 = $25

L at state 1 = $21

K at state 2 = $20

L at state 2 = $27

Let K(1) = $20 denote the time 0 price of asset K and L(1) = $19 the time 0 price of asset L.

(a) Assuming no arbitrage opportunities, what are the values of the unit claims, at time 0?

(b) What is the risk-free rate of return that must exist in this market?

Reference no: EM131506765

Questions Cloud

What is annuity worth in terms of single equivalent amount : An annuity provides for 10 consecutive end-of-year payments of $72,000. What is the annuity worth in terms of a single equivalent amount of today’s dollars?

Characteristics of one of their unique product designs : Select a company and provide two characteristics of one of their unique product designs. Explain how this product design is related to their business strategy.

Create a common-sized income statement for the three years : Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement?

What was the real interest rate earned on an ounce of gold : In January of 1980, a troy ounce of gold sold for $850 (an all-time high). Over the past 28 years, suppose the CPI has grown at a compounded annual rate of 3.2%

What is risk-free rate of return that must exist in market : Assuming no arbitrage opportunities, what are the values of the unit claims, at time 0? What is the risk-free rate of return that must exist in this market?

Determine the indifference point : A. Given these two alternatives, determine the indifference point (where total costs are equal).

What is the profitability index using a discount rate : What is the profitability index using a 14% discount rate? What does this mean?

What is the total cost of a four-year college education : Suppose it costs $18,000 per year (in early 2014 dollars) for tuition, room, board, and living expenses to attend a public university.

Briefing a legal case involving cps : What are the steps to briefing a legal case involving cps and possibly a parental termination?

User Account

All Pages