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Consider the following situation. Suppose the risk-free rate is 10% per binomial period, and there are two possible periodic rates of return on a stock,
Consider the following situation. Suppose the risk-free rate is 10% per binomial period, and there are two possible periodic rates of return on a stock, +20% (State 1 ) and 5% (State 2 ). The current price of the stock is $300. Using only stock and bond positions, create a portfolio (SBP) at time 0 that will not require any additional cash inflows or outflows at time 1 (but will require dynamic adjustments) and whose value will be as follows at time 2 : Verify your work by showing the tree diagram for your portfolio
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