Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:We know the prices and payoffs for securities 1 and 2 and they are represented as follows.
Security
Cash Flow in One Year
Strong Economy
Market Price Today
$25
$70
Asset Payoffs in One Year ($)
Weak Economy
$7,000
Weak Economy
Strong Economy
$15,000
$0
$100
The risk-free rate was calculated to be 5.2632%. Assume the probabilities of the weak economy and the strong economy are both 0.50. Suppose a company will last
one year and its assets will generate payoffs in one year as follows. Complete parts a through c.
$100
$0
a. What is the value of the assets today? What is the expected payoff from the assets in one year? What is the expected return of the assets and what is the risk
premium for the assets?
The assets today have a value of $
(Do not round until the final answer. Then round to the nearest dollar)
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