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To my point of view, the answer is hidden in your question. You correctly stated some of the BS assumptions and empirically it is proven that they are not true (volatility is not constant and the assumption regarding the distribution of returns is unrealistic due to fat tails). The model is as good as its assumptions are. Given that volatility is the ...


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Well, hopefully your calculations are right. There are a few things to remember: The carry can be higher than what you are thinking. Very often you will get charged if you are long or short. That can cost a lot depending on the name. Implied is theoretically always higher than realized. You are selling insurance. You should collect a premium more ...


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APT assumes that idiosyncratic risk is zero on average: $E[e_i]=0$. The law of large numbers. From 1 and 2 it follows that as N increases, the weighted sum of idiosyncratic risks will converge to zero: $\lim\limits_{N\to\infty}\sum\limits_{i=1}^N e_p=\lim\limits_{N\to\infty}\sum\limits_{i=1}^N w_ie_i=0$ Strictly speaking some restrictions on the weights ...


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You're half way there. When $ R < D \ (< U) $, the return of the stock dominates the risk-free return in all states of the world. To benefit from that, just borrow cash and invest in the stock. At $t=0$ this requires no net investment: borrowing cash means your account is credited $S_0$, while subsequently buying the stock suggests it is debited ...



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