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Unformatted text preview: to be $48. On the other hand, if the market does poorly, the expected price is $35. The riskfree rate for the period is 2%. What is a fair price for the project? 80*.3+50*.5+0*.2 = 49 30*.3+15*.5+0*.2 = 16.5 Invest A in the market and B in the riskfree investment: A*48 + B*102 = 49 A*35 + B*102 = 16.5 A = 2.5 B = 0.6961 Fair price = 40*A+100*B = 30.3922 2. Given two stocks in the market with the following current pricing and expected pricing in two potential future states, determine the riskfree rate. Current Price Price if Market Goes Up Price if Market Goes Down Stock 1 31 40 20 Stock 2 60 80 30 A*40 + B*80 =100* (1+r) A*20 + B*30 = 100*(1+r) A*31 + B*60 = 100 A = 14.29 B = 5.71 r = .1429 49 ? 16.5...
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This note was uploaded on 10/18/2010 for the course ENGINEEIRI CHE374 taught by Professor Y.lawrynshyn during the Fall '09 term at University of Toronto Toronto.
 Fall '09
 Y.Lawrynshyn

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