SYLLABUS Previous: 3.5 Hedging a bond
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3.6 Computer quiz
 By combining anticorrelated 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 riskfree profits
 without using arbitrage opportunities, a portfolio grows at the riskfree 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 deltahedging 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 BlackScholes 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
