Re: DSE 2010

Posted by Amit Goyal on Apr 04, 2012; 3:12pm
URL: http://discussion-forum.276.s1.nabble.com/DSE-2010-tp6511571p7436830.html

By no arbitrage condition, two assets giving the same return must cost the same. Now a portfolio of (0.5 bond, 0.5 stock) also generate a return vector (3, 0) (this is the reason why we equated). We know the cost of this portfolio is 1(0.5)+(3)(0.5) = 2  (because the cost of stock is 3 and cost of bond is 1). This third asset also generates a return vector (3, 0) so it must also cost 2 (by no arbitrage condition).