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5. The current price of a tradable (non-dividend) security S is 100 and its future prices follow a binomial lattice with u= 1.5 and d=v1,
5. The current price of a tradable (non-dividend) security S is 100 and its future prices follow a binomial lattice with u= 1.5 and d=v1, i.e., if the market is up next year the security's price will be 150; if the market is "down" next year the security's price will be 66. 6. A project under consideration has a present value of discounted expected subsequent future) cash flow of 1500 if the market is up next year, and has a present value (of discounted expected subsequent future) cash flow of 666. 6 if the market is down next year. The risk-free rate is 5%. Questions: 1. (a) What is the project's PV ? (b) What are the objective probabilities if the required expected rate of return is 25%? (C) What is the expected rate of return if the objective probability the market will go up is 0.6? 5. The current price of a tradable (non-dividend) security S is 100 and its future prices follow a binomial lattice with u= 1.5 and d=v1, i.e., if the market is up next year the security's price will be 150; if the market is "down" next year the security's price will be 66. 6. A project under consideration has a present value of discounted expected subsequent future) cash flow of 1500 if the market is up next year, and has a present value (of discounted expected subsequent future) cash flow of 666. 6 if the market is down next year. The risk-free rate is 5%. Questions: 1. (a) What is the project's PV ? (b) What are the objective probabilities if the required expected rate of return is 25%? (C) What is the expected rate of return if the objective probability the market will go up is 0.6
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