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Finding an Arbitrage Portfolio Assignment Paper 5. (10 POINTS) The following table provides the rates of return of 3 stocks under different states of the market: (a)Complete the following table with future prices (1) (b) Find an arbitrage portfolio using these 3 stocks. Hint: your strategy should give a profit regardless of the state of the economy. You may find this table useful: Finding an Arbitrage Portfolio Assignment Paper ORDER YOUR PAPER NOW Step 1/2 (a) Completing the table with future prices: Stock State 1 Return State 2 Return State 3 Return State 1 Price State 2 Price State 3 Price A 10% 20% -5% $11 $12 $9.50 B 5% 15% 25% $10.50 $12.25 $15.63 C -3% 6% 8% $9.70 $10.28 $11.10 Explanation for step 1 (b) To find an arbitrage portfolio, we need to find a combination of stocks that will give us a profit regardless of the state of the economy. One possible strategy is: Finding an Arbitrage Portfolio Assignment Paper Short sell 1 share of Stock A at $11 Buy 1 share of Stock B at $10.50 Buy 0.5 shares of Stock C at $4.85 (total cost of $9.70) Step 2/2 The initial investment in this portfolio is $10.55, which we obtained by short selling Stock A for $11 and spending on the other two stocks. The payoff of this portfolio in each state of the economy is: Finding an Arbitrage Portfolio Assignment Paper ORDER YOUR PAPER NOW Explanation for step 2 State 1: State 2: State 3: Final answer Regardless of the state of the economy, the payoff of this portfolio is positive, meaning that we have an arbitrage opportunity. We can make a profit of $1.075 in state 1, $0.9625 in state 2, and $2.9275 in state 3. Finding an Arbitrage Portfolio Assignment Paper
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Expert Answer

Finding an Arbitrage Portfolio Assignment Paper 5. (10 POINTS) The following table provides the rates of return of 3 stocks under different states of the market: (a)Complete the following table with future prices (b) Find an arbitrage portfolio using these 3 stocks. Hint: your strategy should give a profit regardless of the state of the economy. You may find this table useful: Finding an Arbitrage Portfolio Assignment Paper

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Step 1/2
(a) Completing the table with future prices:
Stock State 1 Return State 2 Return State 3 Return State 1 Price State 2 Price State 3 Price
A 10% 20% -5% $11 $12 $9.50
B 5% 15% 25% $10.50 $12.25 $15.63
C -3% 6% 8% $9.70 $10.28 $11.10
  • Explanation for step 1
(b) To find an arbitrage portfolio, we need to find a combination of stocks that will give us a profit regardless of the state of the economy. One possible strategy is: Finding an Arbitrage Portfolio Assignment Paper
  • Short sell 1 share of Stock A at $11
  • Buy 1 share of Stock B at $10.50
  • Buy 0.5 shares of Stock C at $4.85 (total cost of $9.70)
Step 2/2
The initial investment in this portfolio is $10.55, which we obtained by short selling Stock A for $11 and spending
on the other two stocks. The payoff of this portfolio in each state of the economy is: Finding an Arbitrage Portfolio Assignment Paper

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  • Explanation for step 2
  • State 1:
State 2: State 3:
Final answer
Regardless of the state of the economy, the payoff of this portfolio is positive, meaning that we have an arbitrage opportunity. We can make a profit of $1.075 in state 1, $0.9625 in state 2, and $2.9275 in state 3. Finding an Arbitrage Portfolio Assignment Paper

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