Use the information for the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below:
-Suppose a security with a risk-free cash flow of $1000 one year from now trades for $909 today.If there are no arbitrage opportunities,then the current risk-free interest rate is closest to:
A)8%.
B)10%.
C)11%.
D)12%.

Question

Use the information for the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below: 
-Suppose a security with a risk-free cash flow of $1000 one year from now trades for $909 today.If there are no arbitrage opportunities,then the current risk-free interest rate is closest to:
A)8%. 
B)10%. 
C)11%. 
D)12%.

Quizplus · Accepted Answer

The present value of the cash flow is calculated using the formula: PV = FV / (1 + r). Here, 909 = 1000 / (1 + r). Solving for r gives r = (1000/909) - 1, which is approximately 0.10 or 10%.

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