Suppose there are two securities a and b what is the risk, Financial Management

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Suppose there are two securities a and b what is the risk

Use the table to answer the following question.

Market Price Cash Flow in One Year

Security Today Poor Economy Good Economy

A 200 840 0

B 600 0 840

C 840 4200

a) Suppose there are two securities A and B. What is the risk free interest rate in this economy?

b) Suppose there is the third security C whose risk premium is 30%. Its payoff is given as above. Assume that the probability of poor economy is 0.5 and that of good economy is 0.5. Is there an arbitrage opportunity in this economy?

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Financial Management: Suppose there are two securities a and b what is the risk

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Financial Management: Suppose there are two securities a and b what is the risk

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