Answer question 11 10. Recall that the risk-neutral probability of an asset corresponds to the probability for which theexpected return on the asset equals the risk-free rate. Consider a special case where the currentasset value is So = 100, and the annual risk-free rate is r = 0%. The asset does not pay dividends.Additionally, consider a simple distribution in which the asset price goes up by $10 with probabilityp and drops by $10 with probability 1 - p. Based on this information, what is the risk-neutralprobability?(a) 0.55(b) 0.50(c) 0.45(d) 1.0011. Consider the same information from the previous question. The price of a six-months forwardcontract is $100. What is the potential arbitrage profit?(a) $1.00(b) $0.00(c) $0.50(d) -$0.50

Data given: S0=100 R=Risk free rate=(1+0%)=1 u= $110/100=1.1 d=$90/100 =0.9

Answered: 11. Consider the same information from…

11. Consider the same information from the previous question. The price of a six-months forward contract is $100. What is the potential arbitrage profit? (a) $1.00 (b) $0.00 (c) $0.50 (d) -$0.50

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: Solve by using formulas. (Round your answer to the nearest cent.) Present value (in $) of an annuity…

A: Present value of annuity due is calculated using following equation Present value =…

Q: The expected constant-growth rate of dividends is ________% for a stock currently priced at $67,…

A: Current Stock Price os $67 The dividend paid now is $8 The required return is 18% To Find: Growth…

Q: Given the data below about two mutually exclusive projects with conventional cash flows and the same…

A: The difference between the current value of cash inflows and the outflow of cash over a period of…

Q: A company is planning to expand its business after 10 years. T planned expansion would require an…

A: The concept of compounding will be applied here. As per the concept of compounding money invested…

Q: When a dividend has been declared , it becomes a liability of the firm and can not be recinded…

A: Dividend payments are distribution of profits or earnings by a company to its shareholders. The…

Q: The Long Leading Index is intended to provide earlier signals of major turning points of the…

A: The Long Leading Index is a composite economic indicator that is designed to provide earlier signals…

Q: Individuals in High tax brackets prefer high dividend payouts. True or false

A: Dividend payout is the proportion of dividends distributed to shareholders out of Net Income. The…

Q: At yield levels that are close to the bond's coupon rate, is the price of an option-free bond higher…

A: Since, the putable bond offers the investor the option to sell the bond back to the issuer at a…

Q: Saxon Products, Incorporated, is investigating the purchase of a robot for use on the company’s…

A: Solving Q 4B Working Note #1 Computation of annual net cost savings: Description Amount ($)…

Q: Brody borrowed from a bank at 5.06% compounded monthly; he settled the loan by repaying $4,460 at…

A: The interest rate Compounded monthly is 5.06% Monthly payments are $4,460 The time period is 2 years…

Q: 24. What will be the lower bound for the price of a three-month European put option on a non-…

A: As per our guidelines we are supposed to answer only one question (if there are multiple questions…

Q: 9.) Find the first month of the amortization schedule for a fixed-rate mortgage if the loan amount…

A: A mortgage is a loan that is taken for purchasing a property with the property itself acting as…

Q: What is the Internal Rate of Return for the following net annual cash flows? Period Cash flows Today…

A: Internal rate of return (IRR) is the rate at which present value of cash inflows will be equal to…

Q: You want to construct a portfolio containing equal amounts of U.S. Treasury bills, stock A, and…

A: The question is related to Portfolio Management. The beta of Portfolio is the weighted beta of all…

Q: Mr. Deneau accumulated $97,000 in an RRSP. He converted the RRSP into a RRIF and started to withdraw…

A: Present value of an annuity: The present value of a cash flow stream of an annuity is calculated by…

Q: Company, a financial institution, allows Integrity Company to borrow P1,300,000 with 8% interest.…

A: The effective interest rate is the actual rate of interest on the loan. This is calculated on the…

Q: dividuals, corporations, or governments with excess funds to those with deficient funds. Even…

A: the money market instruments are all such instruments which will be helping in raising capital for…

Q: Describe, in words, how to use the variable growth rate technique to value a stock

A: The variable growth rate is the rate of growth which is not constant and various companies who are…

Q: Present value with periodic rates. Sam Hinds, a local dentist, is going to remodel the dental…

Q: Please provide 4 reasons why separate capital budgets are important (in other words, what are 4…

A: Separate capital budgets are important because it will help in analysing the risk associated with…

Q: Suppose you are buying your first condo for $190,000, and you will make a $10,000 down payment. You…

A: Monthly payments refer to the amount that is being in every month including the principal and…

Q: An immediate annuity makes monthly payments for 20 years. During the first year, each monthly…

A: An annuity is a payment series that provides an income to the holder in exchange for a lump-sum…

Q: S Corp. is expected to pay a $2.55 dividend at year end, the dividend is expected to grow at a…

A: Weighted Average Cost of Capital (WACC) = (Weight of Equity x Cost of Equity) + (Weight of debt x…

Q: from the given information calculate EFS and P/E ratio Net Income : 5,00,000 8% prference share…

A: In the given case, the income is given which is after deducting the expenses from the total income .…

Q: The Quick Ratio is often use in conjuction with the current ratio because A It is easier to…

A: In finance we use different financial ratios to determine the financial health and position of a…

Q: ¿Cuánto terminará pagando al final de su hipoteca de 30 años a una tasa de interés mensual compuesta…

A: el pago mensual es( Monthly payment) $1,169Tasa de interés compuesta mensual(Interest rate…

Q: XYZ corp expects to earn $3.8 per share next year and plow back 34.21% of its earnings (i.e., it…

A: Dividend next year (D1) = 2.5 Let the constant growth rate = g Price per…

Q: What is the NPV of the following cash flows if the required rate of return is 0.09? Year 0…

A: Required rate of return = 0.09 Year Cash flow 0 -6816 1 3577 2 3505 3 2732 4 3757

Q: Wrett purchases a new four-wheeler with a loan from his bank. The bank requires that he use his car,…

A: 4-wheeler is $2500.00.

Q: You would like to form a portfolio. You have the following information: ADCB stock has an average…

Q: An industrialist is considering the purchase of a new machine for $50000. If purchased, the machine…

A: The question is related to the Capital Budgeting. The Net Present Value (NPV) is calculated with…

Q: A share of common stock just paid a dividend of SI. 25. If the expected growth rate for this stock…

A: Gordon growth model The Gordon growth model determines a company's stock price based on the…

Q: Which of the following statements is correct? A. a. Since accounts payable and accruals must…

A: Additional funds needed refers to the concept of finance which is used for the expansion of its…

Q: The Financial Accounting Standards Board has established a standard for revenue recognition for…

A: Introduction:- The Financial Accounting Standards Board (FASB) is the private, non-profit…

Q: Compute the size of the final payment for the following loan. Periodic Payment Made at: Principal $…

A: Components of the time value of money Money is worth more today than the same amount of money in the…

Q: 1) Increasing its dividend retention rate 2) Increase its ROE 3) Increase

A: The dividend growth rate = ROE or return on equity*(1-payout ratio) or ROE*dividend retention ratio

Q: n with a strike p

A: and is perfect speculation. So Payment for call X=110 = 20, And receipt on selling the put= 10 So…

Q: A trader buys (long) a call option with a strike price of $120 and sells (short) a put option with a…

A: The call Cost is $20 Put Cost is $10 The strike price for the call option is $120 The strike price…

Q: 6. Which one of the following statements is incorrect regarding the margining of exchange-trade…

A: The future contract is a type of exchange traded contract which is standardised in nature and which…

Q: Suppose you just won a lottery of $100 million, that will can be cashed out over 5 years ($20…

Q: Do large cap stocks have the highest annual volatility historically?

A: The large cap stocks are all such stocks which will be having very high market capitalization and…

Q: A mutual fund has total assets of $39,333,444 and liabilities of $6,753,789. If there are 11,521,000…

A: The net asset value of the fund is a representation of the per-share value of any mutual fund. This…

Q: What is the lower bound for calls on a non-dividend-paying stock with a current price = $25, strike…

A: The current Price is $25 The strike price is $22 The risk-free rate is 10% The time to expiration is…

Q: The covariance of stock Walter Inc. and Boo-boo Corp. is 0.50. The standard deviation of Walter is 1…

A: Stocks refer to the concept which is defined as the security that represents the ownership of the…

Q: A project has a 70% chance of producing a 10% return and a 30% chance of generating -4% returns.…

A: The expected return is calculated with the help of following formula Expected Return = Return ×…

Q: Question 13 Given the following exchange rates, which of the multiple-choice choices represents a…

A: Arbitrage is an opportunity for arbitrators to earn profits by buying and selling the same asset at…

Q: What is the income tax due using a 21 % federal income tax rate for a corporation with the following…

A: Expected taxable income = Gross income from sales - accumulated expenses - depreciation charged.…

Q: today's

A: The present value of a zero coupon bond = Face value/(1+interest rate)^n

Q: You short a 28-30 strangle for $9.75. This means you sell a call with a strike of 30 for $5.25, and…

A: Concept. Strangle involves holding both put option and call option with same expiry date but…

Q: In measuring the implementation Shortfall (IS), a common benchmark price for hypothetical The…

A: Hypothetical trading refers to the market that is used for surveying the product and fulfilling…

Question

Answer question 11

10. Recall that the risk-neutral probability of an asset corresponds to the probability for which the
expected return on the asset equals the risk-free rate. Consider a special case where the current
asset value is So = 100, and the annual risk-free rate is r = 0%. The asset does not pay dividends.
Additionally, consider a simple distribution in which the asset price goes up by $10 with probability
p and drops by $10 with probability 1 - p. Based on this information, what is the risk-neutral
probability?
(a) 0.55
(b) 0.50
(c) 0.45
(d) 1.00
11. Consider the same information from the previous question. The price of a six-months forward
contract is $100. What is the potential arbitrage profit?
(a) $1.00
(b) $0.00
(c) $0.50
(d) -$0.50

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Assume that there are two factors that price assets. Risk free rate is 4%. Factor 1 has anexpected return of 8% and factor 2 has an expected return of 10%. Calculate the expectedreturn for each asset with the following sensitivities using the Arbitrage Pricing Theory (APT). (a) β1 = 1.2, β2 = 0.9; (b) β1 = 1.5, β2 = −0.60;
Consider a one-period model with N = {1,2,3} and two risky assets S1, S2 whose with current prices are 71 = 42 and 12 = 23 respectively. At time one, the price of S1 is believed to be either 44, 43, or 40 while the price of S2 is believed to be either 27, 22, or 20. Suppose that the risk-free interest rate is 3%. What is the unique risk-neutral probability measure Q in this situation? Select one: О а. Q(1) — 0.35, Q(2) — 0.27, Q(3) — 0.38 O b. Q(1) = 0.63, Q(2) = 0.34, Q(3) = 0.03 Ос. Q(1) — 0.25, Q(2) — 0.62, Q(3) — 0.13 O d. Q(1) = 0.35, Q(2) = 0.62, Q(3) = 0.03
Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3, cov(Y,M) = .5. %3D (a) Is the expected return higher on X or Y? (b) Suppose var(M) = 1.5, what are the betas of X and Y? (c) Suppose the expected market return is 20% and the risk free rate is 5%, what is the expected returns of X and Y?. (d) Given your analysis in (a)-(c), what type of investor would prefer asset X to asset Y?
Asset X has an expected return of 10% and volatility of 10% . If its Sharpe Ratio is 0.60, what is the risk-free rate?
Suppose that there is an upward shift in the expected rate of return on the risky asset, from 15% to 17%. If all other parameters remain unchanged, what will be the slope of the CAL for y≤ 1 and y> 1?
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
9. The risk neutral probability is equal to 0.5 and the risk free rate is 4%. Furthermore the present value of cash flows is equal to V=90. If d = 1/u, then what is the value of Vin the downstate in the next period? Please round your answer to one decimal place and use a period to indicate the decimal place (e.g. 100.7 instead of 100,7). Enter answer here
Supposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?
2. Suppose that you have a riskfree asset and N risky assets for investment. The rate of return on the riskfree asset is r,, while the (Nx1) vector of the rate of return on the N risky assets is r, which is multivariate normal, i.e., r N(u, E). Your utility function for a portfolio that consists of the riskfree asset and the N risky asset is u(r,)=r,-=o, 2 Suppose that the sum of investment proportions on the riskfree and risky assets is one. Answer the following question. A. What is your optimal investment proportion in the risky assets? How is your investment on the riskfree asset affected by different values of 2? B. Suppose that there is only one risky asset i. Show the effects of the Sharpe ratio (4,/0, ) on the investment proportion in the risky asset.
Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf] Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate? A) zero B) 0.5 C) 1.0 D) its random
Consider 1-factor model and assume that the price of a certain fixed income security P(y) for y=9%, 9.05% and 8.95% is given by P(0.09)=$5,000; P(0.0905)=$4,980; P(0.0895)=$5,030. Find the estimate for DV01, Duration, and Convexity of this security. Keep at least 4 decimal digits while performing your calculations.
Father Time asks us what is the expected return on asset A if it has a beta of .75, the expected market return is 12%, and the risk- free rate is 4%? А. 6.0% В. 6.5 C. 7.0 D. 8.0 E. 10.0

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS