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A market currently consists of a risky $110 stock and $80 risk-free bond. Suppose that, in 2 months, there's a 40% chance that the stock's
A market currently consists of a risky $110 stock and $80 risk-free bond. Suppose that, in 2 months, there's a 40% chance that the stock's price will be $125 or $85 otherwise, and the bond will be worth $95.71. (a) Find the single period rate of return on the stock shares if: (i) the value of the stock decreases. rs = % to 2 decimal places (ii) the value of the stock increases. r = % to 2 decimal places (b) Find the single period rate of return on the bond units. TB= % to 2 decimal places (c) Use the results in parts (a) and (b) to determine whether an arbitrage opportunity exists. An arbitrage opportunity exist since
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