Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. 2. suppose that all investors in the market have a

2. Suppose that all investors in the market have a 2-period horizon and can either...

50.1K

Verified Solution

Question

Accounting

image
2. Suppose that all investors in the market have a 2-period horizon and can either hold a perfectly liquid asset with a return of 1%, or an illiquid asset that costs 2% to trade in total. a) What return on the illiquid asset makes investors indifferent between the liquid and the illiquid asset? b) Now suppose there are also some longer-horizon investors who trade less frequently, say with horizon 20. What return do they get, net of trade costs, if they hold the illiquid asset? c) Now suppose that there is an even more illiquid asset that costs 3% to trade. Long horizon investors with a horizon of 10 periods specialize in holding this asset, which must be priced to make them indifferent between holding this 3%-trade-cost asset and another 1%-trade-cost asset with a return of 2.5%. What return must the 3%-trade-cost asset offer

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students