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This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.

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This is not an essay assignment, this is a problem set. there are 2 questions in the word doc.
Answered 1 days After Dec 04, 2022

Solution

Rochak answered on Dec 06 2022
35 Votes
Answer 2:
a. The risk-less portfolio will be one which will be convenient because the 6% return will ensure that the return I will get is guaranteed. The same will not be possible for a risky venture which will not provide a significant guarantee on the returns and therefore the same is not convenient to me.
. Probability
p = Probability that the stock price will go up
q = Probability that the stock price will go down
p = ((1+(Time Period*Risk free rate)) – Downward Factor)/(Upward Factor – Downward Factor)
= ((1+(0.33*6%)-0.96)/(1.05-0.96)
= 0.66
q = 1 – p
= 1 – 0.66
= 0.34
c. Present Value
    Node Time (yrs)
     
    0.00
     
     0.33
     
     0.66
     
     0.99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     44.10
    
     46.31
    
    
    
    
    
    
     5.65
    
     8.31
    
    
    
    
     42.00
    
    
    
    
    
    
    
    
     3.83
    
    
    
    
    Stock
    
     40.00
    
    
    
     40.32
    
     38.71
    Option
    
     2.65
    
    
    
     0.46
    
     0.71
    
    
    
    
     38.40
    
    
    
    
    
    
    
    
     0.45
    
    
    
    
    
    
    
    
    
    
     36.86
    
     35.39
    
    
    
    
    
    
     0.46
    
     -
At t = 1,
C+ = Max(0,46.31-38) = 8.31
C-+ = Max(0,38.71-38) = 0.71
C-- = Max(0,35.39-38) = 0
At t = 0.66
C+ = (Upward Probability * C+ + Downward Probability *C+-)/(1+Risk free rate)* Time period
= 5.65
C+- = (Upward Probability * C+- + Downward Probability...
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