Question

Omega's current stock price is $10 per share. Omega will not pay dividends and faces the following conditional prices in a year: State Good Probability 0.3 Price $20 $10 $5 Medium 0.4 Low 0.3 In the Good state in a year, Alpha's conditional price is $5 with an associated 25% return. Alpha will pay a dividend of $1 with certainty in a year (with Probability=1). The equally weighted portfolio (50%/50%) that includes Alpha and Omega will be riskless if Alpha's conditional prices in a year are: $15 and $10 in Medium and Low states, respectively $5 and $5 in Medium and Low states, respectively *10 de medida

Answer 1

Riskless occurs when in all the states we get the same value of the portfolio

As in Good State, the value of the portfolio=value of Omega+Value of Alpha=20+5=25

So, in all sgtates value must be 25

In Medium, Value of Alpha should be =25-10=15
In Low, Value of Alpha should be =25-5=20