Tick all those statements on arbitrage that are correct (and don't tick those that are incorrect). a. If there is a sporting event with 3 different outcomes which have the odds o, 1, 2, 3 then there is an arbitrage opportunity for a suitable betting strategy. b. The arbitrage theorem essentially tells us that either there exists a risk-neutral distribution or there is an arbitrage opportunity. c. If there is an arbitrage opportunity then this implies that a risk-neutral distribution exists. Od. In real markets there are ocasionally small arbitrage opportunities due to lack of information. Oe. When constructing suitable betting strategies, the number m of outcomes of an event and the number n of possible wagers are always the same.

Tick all those statements on arbitrage that are correct (and don't tick those that are incorrect). a. If there is a sporting event with 3 different outcomes which have the odds o, 1, 2, 3 then there is an arbitrage opportunity for a suitable betting strategy. b. The arbitrage theorem essentially tells us that either there exists a risk-neutral distribution or there is an arbitrage opportunity. c. If there is an arbitrage opportunity then this implies that a risk-neutral distribution exists. Od. In real markets there are ocasionally small arbitrage opportunities due to lack of information. Oe. When constructing suitable betting strategies, the number m of outcomes of an event and the number n of possible wagers are always the same.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Tick all those statements on arbitrage that are correct (and don't tick those that are incorrect). a. When constructing suitable betting strategies, the number m of outcomes of an event and the number ŉ of possible wagers are always the same. b. The arbitrage theorem essentially tells us that either there exists a risk-neutral distribution or there is an arbitrage opportunity. c. If there is an arbitrage opportunity then this implies that a risk-neutral distribution exists. d. In real markets there are ocasionally small arbitrage opportunities due to lack of information. e. If there is a sporting event with 3 different outcomes which have the odds 0₁ = 1, 2, 3 then there is an arbitrage opportunity for a suitable betting strategy.
Tick all those statements on arbitrage that are correct (and don't tick those that are incorrect). a. When constructing suitable betting strategies, the number m of outcomes of an event and the number of possible wagers are always the same. O b. In real markets there are ocasionally small arbitrage opportunities due to lack of information. c. The arbitrage theorem essentially tells us that either there exists a risk-neutral distribution or there is an arbitrage opportunity. Od. If there is an arbitrage opportunity then this implies that a risk-neutral distribution exists. O e. If there is a sporting event with 3 different outcomes which have the odds 0₂ = 1, 2, 3 then there is an arbitrage opportunity for a suitable betting strategy.
3. The market has three assets. In addition, PAB = 0. F A B 0.2 0.3 1 3 E(r) 0.1 0 0 (a) If the investor can invest in the risk-free asset and one of the risky assets (either A or B, but not both). Will she choose A or B to construct a portfolio with the risk-free asset? Why? (Hint: you can draw a graph to answer this question.)
3. Suppose the market is wild; it is modeled by o → (a) What is the value of a Call? (b) What is the value of a Put? (c) Explain both answers in terms of finance.
Consider a financial market consisting of a bank account So(t) and a stock S₁ (t) modelled on a probability space (, F, P) with the time indices t = 0, 1, 2, ..., T. Give conditions under which a market is arbitrage-free. Explain what it means to say that a market is complete. Give conditions under which an arbitrage-free market is complete.
1. Suppose there are three complex securities and three different states as follows: Security So S₁(1) S₁ (2) S₁ (3) 1.2 3 0 0 1.8 4 2 0 1.2 2 1 1 2 10 4 A B C D (a) Find the arbitrage-free price of asset D. (b) What is the risk-free return compatible with these asset prices?
Which of the following statements are true if the efficient market hypothesis holds?a. It implies that future events can be forecast with perfect accuracy.b. It implies that prices reflect all available information.c. It implies that security prices change for no discernible reason.d. It implies that prices do not fluctuate.
Under prospect theory, the shape of the utility function implies that investors are____________. A) Always risk averse B) Risk seeking when it comes to losses C) Always risk seeking
A Listen An example of the no-arbitrage principle holding would be when all risk-free investments offer investors: A) the same return B) negative returns C) positive returns D) zero return
3. A market consists of two risky assets and no risk-free asset. Let R₁ and R₂ denote the return on each of the risky assets. Using market data the following have been estimated: E[R₁] = 0.10, E[R₂] = 0.15, o² = Var(R₁) = 0.1², o² = Var(R₂) = 0.2² and p1,2 = -1/2 where P1,2 denotes the correlation coefficient for R₁ and R₂. (i) Given that an investor is targeting a total expected return of portfolio, what is the minimum variance that can be achieved? = 0.125 on a (ii) Determine the global minimum variance portfolio and the expected return and variance of return on this portfolio. (iii) Using your answers to parts (i) and (ii) make a rough sketch of the minimum- variance set in - o2 space. You should indicate the efficient frontier and the global minimum variance portfolio. (iv) Without further calculation, explain how you would expect the variance of return calculated in (ii) to change if the two risky assets were independent.
Which of the following is/are true about the Efficient Markets Hypothesis (EMH) I.The required rate of return on a stock is equal to the expected return II. Stocks are fairly valued III. Stocks are always in equilibrium IV. It is impossible for an investor who does not have inside information to constantly “beat the market” Select one: a. I and II only b. II and IV only c. I only d. All of the above
A variant of the Glosten-Milgrom model. The underlying stock can take on one of three values: V < V ∗ < V . with probabilities δV , δV ∗ and δV = 1 − δV − δV ∗ respectively. • The informed trader can decide whether to buy, sell or make no transaction. • In the event that a trade would yield zero or negative profit, the informed trader will not trade. • The uninformed traders always trade. • The model is dynamic, that is, traders are repeatedly drawn and are given the opportunity to trade with the dealer. • The dealer is a monopolist. 1.1 What is the optimal strategy of the informed trader? 1.2 What is the optimal pricing scheme of the dealer? 1.3 If the dealer executes trader with many traders over time, what happens to the bid and ask prices?

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