Question #49531

Here are two questions about an economy that has six states,a through f, and six securities, G through L. The securities payoff matrix is X. Some securities may have negative payoffs in some states, you can think of these as forward contracts

G H I J K L

a 18 21 28 5 9 10

b 14 19 8 23 5 -5

Payoff(matrix) X c 8 11 14 -3 27 20

d 6 23 19 -1 26 14

e 19 -4 25 25 20 -10

f 1 -10 22 18 -1 7

1) Is the market complete?

Yes or No?

2)Sam wants a guaranteed income of 25$.Can you create a portfolio from the six securities to do that? If so how many units of securities H must you include in the portfolio?

a) -0.498 b) 0.200 c)4.39 d)4.57207

G H I J K L

a 18 21 28 5 9 10

b 14 19 8 23 5 -5

Payoff(matrix) X c 8 11 14 -3 27 20

d 6 23 19 -1 26 14

e 19 -4 25 25 20 -10

f 1 -10 22 18 -1 7

1) Is the market complete?

Yes or No?

2)Sam wants a guaranteed income of 25$.Can you create a portfolio from the six securities to do that? If so how many units of securities H must you include in the portfolio?

a) -0.498 b) 0.200 c)4.39 d)4.57207

Expert's answer

G H I J K L

a 18 21 28 5 9 10

b 14 19 8 23 5 -5

c 8 11 14 -3 27 20

d 6 23 19 -1 26 14

e 19 -4 25 25 20 -10

f 1 -10 22 18 -1 7

1) The market is complete.

2) If Sam wants a guaranteed income of 25$. We can create a portfolio

from the six securities to do that. The guaranteed income is possible in

state a. In this case (18+21+28+5+9+10)/21 = 4.39 units of securities H

must you include in the portfolio.

So, the right answer is c) 4.39.

a 18 21 28 5 9 10

b 14 19 8 23 5 -5

c 8 11 14 -3 27 20

d 6 23 19 -1 26 14

e 19 -4 25 25 20 -10

f 1 -10 22 18 -1 7

1) The market is complete.

2) If Sam wants a guaranteed income of 25$. We can create a portfolio

from the six securities to do that. The guaranteed income is possible in

state a. In this case (18+21+28+5+9+10)/21 = 4.39 units of securities H

must you include in the portfolio.

So, the right answer is c) 4.39.

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