Which of the Following Is Not Sufficient for a Pricing

question 10

Multiple Choice

Which of the following is not sufficient for a pricing tree for risky bonds to be free of arbitrage?

• A) The existence of a risk-neutral pricing probability measure.
• B) The existence of a general equilibrium in the asset markets.
• C) All normalized (discounted) assets are martingales.
• D) On the tree, the gross risk-free one-period return is straddled by the return when rates move up and when rates move down.

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Definitions:

Discount Rate

The discount rate applied to the future cash flows of a financial instrument to determine its current value.

Present Value

The current value of a future sum of money or stream of cash flows, given a specified rate of return.

Mutual Fund

An investment vehicle comprised of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets.

IRA Funds

Investment vehicles that provide individuals with a means to save for retirement with tax advantages.