Question

24. Consider non-dividend-paying assets A and B. The asset prices one year from now will
depend on the state of economy as follows:
Asset price in one year
Boom Recession
asset A 50 20
asset B 30 30
Currently asset A sells for $15 and asset B sells for $27. Which of the following
strategies results in an arbitrage?
(a) buy 1 unit of asset A and sell 0.6 unit of asset B
(b) sell 1 unit of asset A and buy 0.5 unit of asset B
(c) sell 2 unit of asset A and buy 1.2 unit of asset B
(d) None of the above leads to an arbitrage
25. Consider non-dividend paying stocks A and B. The current stock prices in time 0 are
$45 for A and $32 for B. The stock prices two years from now depend on the state of
economy as follows:
Stock price in two years
Boom Recession
stock A 80 40
stock B 30 40
What is the 2-year risk-free interest rate per annum?
(a) 4.48%
(b) 7.25%
(c) 14.38%
(d) 14.50%

Answer 1

1.