Hello,I'm not sure how to solve this corporate finance questionThanks 1. The table below shows the no-arbitrage prices of securities A and B. The economyis equally likely to strengthen or weaken in one year.SecurityABCash Flow in One YearStrong EconomyMarket Price Today Weak economy23134606006000a. What are the payoffs of a portfolio of one share of security A and one share ofsecurity B?b. What is the market price of this portfolio? What expected rate of return willyou earn from holding this portfolio?c. What is the risk-free interest rate?

There are two possible states of economy. There are two securities whose cash flows in either state,…

1. The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year. Security A B Market Price Today 231 346 Cash Flow in One Year Strong Economy Weak economy 0 600 600 0 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this portfolio? What expected rate of return will you earn from holding this portfolio? c. What is the risk-free interest rate?

1. The table below shows the no-arbitrage prices of securities A and B. The economy is equally likely to strengthen or weaken in one year. Security A B Market Price Today 231 346 Cash Flow in One Year Strong Economy Weak economy 0 600 600 0 a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this portfolio? What expected rate of return will you earn from holding this portfolio? c. What is the risk-free interest rate?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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The table here shows the no-arbitrage prices of securities A and B that we calculated.Cash Flow in One YearSecurity Market Price Today Weak Economy Strong EconomySecurity A 231 0 600Security B 346 600 0a. What are the payoffs of a portfolio of one share of security A and one share of security B?b. What is the market price of this portfolio? What expected return will you earn from holdingthis portfolio Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy isstrong. The risk-free interest rate is 4%.a. Security C has the same payoffs as which portfolio of the securities A and B in problem A-1?b. What is the no-arbitrage price of security C?c. What is the expected return of security C if both states are equally likely? What is its riskpremium?d. What is the difference between the return of security C when the economy is strong and when itis weak?e. If security C had a risk premium of 10%, what arbitrage opportunity would be available?
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