Discuss the following statement: “It is possible to hedge a portfolio against any state of nature if the market is complete”
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Discuss the following statement: “It is possible to hedge a portfolio against any state of nature if the market is complete”
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Solved in 2 steps
- Explain what a “riskless hedge” is and how the riskless hedge concept is used in theBlack–Scholes OPM.1.How does one asset in the same portfolio influence the other one in the same portfolio? And what could be the influence of this relationship to the investor’s portfolio?illustrate the use of derivatives to hedge portfolio risk with an example?
- Critically discuss the effect of diversification on portfolio risk. Is there any limit of diversification?Define the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the nominalrisk-free rate (rRF)? What securities can be used asestimates of rRF?Why does standalone risk differ from portfolio risk? Explain and give examples! Relates your answer with CAPM!
- The security market line depicts:a. A security’s expected return as a function of its systematic risk.b. The market portfolio as the optimal portfolio of risky securities.c. The relationship between a security’s return and the return on an index.d. The complete portfolio as a combination of the market portfolio and the risk-free asset.Describe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.If you introduce a risk free asset in your portfolio of risky assets; how will this change the shape of the opportunity? What are the main implications with respect to portfolio theory?
- Explain with examples how a firm can hedge its risks using optionsImmunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?Explain the difference between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured or calculated, and are they relevant to investors?