Question: Two securities have the following payoffs in two equally likely states of nature at the end of one year: Security j costs $8 today, whereas

Two securities have the following payoffs in two equally likely states of nature at the end of one year:

Security j costs $8 today, whereas k costs $9, and your total wealth is currently $720.
(a) If you wanted to buy a completely risk-free portfolio (i.e., one that has the same payoff in both states of nature), how many shares of j and k would you buy? (You may buy fractions of shares.)
(b) What is the one-period risk-free rate of interest?
(c) If there were two securities and three states of nature, you would not be able to find a completely risk-free portfolio. Why not?

Payoff Security S 2 S10 $20 30 10

Step by Step Solution

★★★★★

3.44 Rating (167 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a If we know the maximum payout in each state it will be possible to determine what an equal payout ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

897-B-C-F-G-F (3146).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Two securities have the following characteristics: Furthermore, the correlation of returns between the securities is 1.0. Determine the risk (standard deviation) of a portfolio consisting of equal...

Consider the following payoffs in a situation where the two firms have to choose simultaneously. (a) How much would Firm A pay to go first? (b) How much would Firm B pay to go first? (c) Can you set...

Assume that two securities constitute the market portfolio. Those securities have the following expected returns, standard deviations, and proportions: Based on this information, and given a...

portfolio, assuming the 4.5) Two securities have the following payoffs in two equally likely states of nature at the end of consisting only of and A. How do you interp one year Ion (03) 8 01 +6+...

"4.5 /Two securities have the following payoffs in two equally likely states of nature at the end of one year Payoff Security $10 $20 10 Security / costs $8 today, whereas & costs $9, and you...

Question c Question 6. State Preferences Theory (independently and detailed solutions) Two securities have the following payoffs in the two equally likely states of nature at the end of one year:...

Question 6. State Preferences Theory (independently and detailed solutions) Two securities have the following payoffs in the two equally likely states of nature at the end of one year: Security j k...

Management has asked for a briefing on what is involved in making this decision. They need to understand several things: What is needed to implement such a system as an infrastructure investment, and...

Having discussed the question of outsourcing versus in-house solutions for Dirt Bikes, in the Dirt Bikes case study, it is time for you to come to your own conclusions. Address the questions below...

Question: Question 1: Are companies willing to provide information voluntarily, if so, when and why? Question 2: What would the utility function of a risk-taking investor look like? What sort of...

Pressurized water fills the tank in Fig. P2.100. Compute the hydrostatic force on the conical surface ABC. 2 m age Water

In the discussion of German and Japanese post-war growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly...

What are several advantages of recording property, plant, and equipment at historical cost?

A doctor has appointments at 9 and 9:30. The amount of time each appointment lasts is exponential with mean 30. What is the expected amount of time after 9:30 until the second patient has completed...

What is the difference between a public and a private corporation?

What is the difference between a primary and a secondary market?

What are some of the differences between the NYSE and NASDAQ?

Many fast food restaurant chains like McDonalds and others have some stores which are directly owned by the company (McDonalds) which hires a manager and staff to manage the restaurants, and some...

The following estimated regression equation is based on 30 observations. y^=17.4+3.8x12x2+7.6x3+2.8x4 The values of SST and SSR are 1,809 and 1,762 , respectively. a. Compute R2 (to 3 decimals). b....

Expected Return Standard Deviation Stock fund ( S ) 14% 34% Bond fund ( B ) 5% 28% The correlation between the fund returns is .0214. What is the expected return and standard deviation for the...