**SYLLABUS** ** Previous:** 3.5 Hedging a bond
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3.6 Computer quiz

- By combining anti-correlated securities, a portfolio becomes

- more risky
- more predictable
- more profitable

- No arbitrage arguments state that

- arbitrage can never exceed the risk free interest rate
- arbitrageurs immediately seize opportunities for making risk-free profits
- without using arbitrage opportunities, a portfolio grows at the risk-free rate

- Which of the following random variables are martingales?

- betting on ``heads'' when you flip a coin
- the value of a share
- the daily price increment to the value of a share in a mature company
- the daily increment to the short term interest rate
- playing Russian roulette

- A discrete rather than continuous delta-hedging of the portfolio

- reduces the expected return of the portfolio
- increases the expected return of the portfolio
- increases the amount of risk in the portfolio

- A negative market price of risk
signifies that

- the underlying is cheap, signalling a good buying opportunity
- the stock market is more volatile than the bond market
- the bond market will outperform the stock market
- the investors expect the underlying to under perform the spot rate

- The coefficients (
,
, etc) in the Black-Scholes and
Vasicek equations

- have been assumed constant
- can be arbitrary deterministic functions of time and the stochastic variable
- can be arbitrary stochastic functions

**SYLLABUS** ** Previous:** 3.5 Hedging a bond
**Up:** 3 FORECASTING WITH UNCERTAINTY
**Next:** 3.7 Exercises