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Consider a market with a risk-free bond b for which do 50

Consider a market with a risk-free bond B, for which Do = 50, = 55, Primer on Pricing Risky Securities 81 and 82 = 60, and a risky stock with the spot price So = 50. Suppose that the stock price at times t = 1 and t = 2 can follow four possible scenarios:

Scenario S₁   S₂
    w¹     60   70
    w²     60 55
    w³     45   45
    w⁴     45   40

(a) Find an arbitrage investment strategy if there are no restrictions on short selling.

(b) Is there an arbitrage opportunity if no short selling of the risky asset is allowed?

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Strategic Management: Consider a market with a risk-free bond b for which do 50

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Strategic Management: Consider a market with a risk-free bond b for which do 50

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