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Unformatted text preview: Why are the forward prices and associated probabilities not equal? 2. Consider the portfolio Z that makes the following payments in four dierent states (VB, B, G, VG). You are also given (physical) probabilities and forward prices (risk neutral probabilities) of each state c prob f VB 60 . 3 . 5 B 10 . 2 . 3 G 10 . 1 . 1 VG 50 . 4 . 1 Suppose the risk-free rate of return is 5 percent. (i) Compute the risk premium of portfolio Z. (ii) Compute the risk premia of the four atomic securities. (iii) Will the market portfolio pay a risk premium in this case? Explain. Note : Do not submit this tutorial assignment, since it will not be marked. 1...
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This note was uploaded on 07/13/2011 for the course ECON 3107 at University of New South Wales.