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The bank offers risk-free, annual interest rates of 2%. You come across an alternative investment option costing $1,000 and offering $1,300 after 1 year. This
The bank offers risk-free, annual interest rates of 2%. You come across an alternative investment option costing $1,000 and offering $1,300 after 1 year. This investment has a 15% chance of failure and offering $0. Use this information for the questions below. 1. Calculate the expected future value of this alternative investment. 2. Calculate the expected interest rate of this alternative investment. 1 3. Calculate the expected future value if you instead took the $1,000 and invested in the risk-free option for 1 year. 4. Would you prefer to invest in the alternative option, or the risk-free option? Explain. 5. Is there an arbitrage opportunity? Explain. = 6. Calculate the risk premium interest rate that will equate the alternative investment with the risk-free option. Why is the risk premium interest rate different from the risk-free rate
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