Quiz 26-1 in ASM Manual
The risk neutral process for interest rates is dr(t) = -.01dt + .08dZ_squiggle (t)
The Sharpe ratio for assets perfectly correlated with the original Browniani motion Z(t) is .2.
r(0) = 5
Calculate the probability that r(4) is greater than .06.
When solving, to find the true drift, they say:
The true process's drift is -.01 - σ*sharpe ratio =-.026.
Why is negative sign used in front of σ*sharpe ratio? I used a positive sign.
The risk neutral process for interest rates is dr(t) = -.01dt + .08dZ_squiggle (t)
The Sharpe ratio for assets perfectly correlated with the original Browniani motion Z(t) is .2.
r(0) = 5
Calculate the probability that r(4) is greater than .06.
When solving, to find the true drift, they say:
The true process's drift is -.01 - σ*sharpe ratio =-.026.
Why is negative sign used in front of σ*sharpe ratio? I used a positive sign.
Risk Neutral Process - Interest Rates
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