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1. Assume the risk-free rate is 5% per annum, continuously compounded. Let S, the price of an asset given by Soe-0.05x5 and dS 0.05S,dt+0.165,dz.
1. Assume the risk-free rate is 5% per annum, continuously compounded. Let S, the price of an asset given by Soe-0.05x5 and dS 0.05S,dt+0.165,dz. Let B, be the price at time t 5 of a (zero-coupon) bond paying $1 at time T 5. Note that So= Bo. Compute the probability that the asset will outperform the bond after the first three years.
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