How Close Should the Value of the Replicating Portfolio Be

question 3

Essay

How close should the value of the Replicating Portfolio be to the asset if we increase the rebalancing frequency?

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent and salaries.

Variable Departmental Costs

Costs that vary directly with the level of output or activity within a specific department of a company.

Incremental Profit

The additional profit derived from making changes to the business operations, such as increasing production or sales.

Cash Payback Period

The duration of time it takes for an investment to generate enough cash flow to recover its initial cost.