Hi all, Why can we just assume that the risk driver is the same? Also, I'm not quite sure how to go about deriving the value of the volatility coefficient, would you be able to advise why y = 0.06/lambda? Thanks in advance for your help!
Notice that it's the same standard Brownian motion, Wt, that's powering St and At. This is what it means for the processes to have the same risk driver, ie the same source of randomness. However, the "market price of risk" argument is no longer mentioned in the Core Reading and so the fact that risky assets with the same source of randomness have the same market price of risk (ie (mu-r)/sigma) is now beyond the scope of the subject.
