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

Assignment Help Financial Management

Reference no: EM131507126

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

1 | $25 | $21

2 | $20 | $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: EM131507126

Questions Cloud

Henrys terminal wealth in both cases and in each state : Henry Morton has an initial wealth endowment of $1,200. What now would be Henry’s terminal wealth in both cases and in each state?

Determine which insulation : Determine which insulation you will choose if you plan to live in the house for 10 years. Use an interest rate of 8%.

Actually maximize our utility function : How many shares and what positions of Y and Z should we choose to build our portfolio so that we actually maximize our utility function?

Nominal rate of return that you earned on this bond : Using graphical method determine the nominal rate of return that you earned on this bond.

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

Using graphical method determine the nominal rate of return : Using graphical method determine the nominal rate of return that you earned on this bond.

Determine the nominal rate of return that you earned on bond : Using graphical method determine the nominal rate of return that you earned on this bond.

Identify a merger and acquisition : Identify a merger/acquisition that has been completed within the past 10 years. What has been reported or suggested as the basis of the merger?

Human nature to think that ethical behavior : It is human nature to think that ethical behavior is more likely provoked when person is being observed.

User Account

All Pages