What should be the risk-free rate

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Reference no: EM132030616

The expected return of Yahoo is 12% with standard deviation of 20% and the expected return of Google is 15% with standard deviation of 25%. The correlation coefficient of Yahoo and Google is -1.

Part 1: What should be the risk-free rate if there is no arbitrage opportunity?

Part 2: Suppose that 1-year zero rate is 1% and 2-year zero rate is 2%. Consider a risk-free bond with maturity of two years and a face value of $100 that has an annual coupon rate of 3%. Let Y denote the yield to maturity for this bond. Write down an equation whose solution provides you the yield to maturity for the bond (you do not need to solve the equation). All rates including the yield are continuously compounded.

Reference no: EM132030616

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