Two assets $A$ and $B$ have the same spot price today. The price of asset $A$ is expected to grow at 10% over the next year and that of asset $B$ is expected to grow at 10% also. Asset $A$ has a standard deviation of returns of 10% over the year and asset $B$ has standard deviation of 15%. Which of the following is true if there are no holding costs or benefits?
A) Asset $A$ 's one-year forward price will be less than that of asset $B$ .
B) Asset $A$ 's one-year forward price will be greater than that of asset $A$ .
C) Asset $A$ 's one-year forward price will be equal to that of asset $B$ .
D) Any of the above may be true.

Question

Quizplus · Accepted Answer

The forward price of an asset is determined by its spot price and the expected growth rate, not by the standard deviation of returns. Since both assets have the same spot price and expected growth rate, their one-year forward prices will be equal.

Two Assets AAA And BBB Have the Same Spot Price Today AAA Is Expected to Grow at 10% Over the Next Year

Two Assets $A$ And $B$ Have the Same Spot Price Today $A$ Is Expected to Grow at 10% Over the Next Year