Question

In the financial market, both "good" and "bad" securities are traded. On the paper gives Both SEK 100 in return, but the risk of a "good" securities becoming worthless is 20 percent. The risk of this happening a "bad" securities is 50 percent. The proportion of good and bad Securities in the market are equal and both buyers and sellers are risk-neutral a) a) What price will the securities be traded if neither buyer nor seller knows about them Is the good or bad variety of quality?

Answer 1

Proportion of good securities = Proportion of bad securities = 50%

For a good security, there is 20% chance of getting 0 returns and (100 - 20)% = 80% chance of getting SEK100 in return, and for a bad security, there is 50% chance of getting 0 returns and (100 - 50)% = 50% chance of getting SEK100 in return.

Trading price = Expected price (SEK) = 50% x [(100 x 80%) + (0 x 20%)] + 50% x [(100 x 50%) + (0 x 50%)]

= 50% x (80 + 0) + 50% x (50 + 0)

= 50% x 80 + 50% x 50

= 40 + 25

= 65