Suppose that S1 follows equation (20.26) with = 0. Consider an asset that follows the process
Question:
dS2 = α2S2 dt − σ2S2 dZ
Show that (α1 − r)/σ1=−(α2 − r)/σ2. (Hint: Find a zero-investment position in S1 and S2 that eliminates risk.)
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