Consider ALZ corp stock. ALZ corp stock does not pay a dividend. The risk-free rate is 7%. The market’s expected return is 10% and its standard deviation is 15%. The stock trades at $50, it has β = 0.7 , and the standard deviation of the stock’s return is 25%. There is a call option on the stock expiring in 1 year at strike 100, which costs $40, and a put option at 110, which costs $80. What is the highest Sharpe ratio that you can achieve, by trading (i.e. taking arbitrary large long and short positions in) the stock, the market, and the call and put options, and what strategy do you use to achieve it?
Consider ALZ corp stock. ALZ corp stock does not pay a dividend. The risk-free rate is 7%. The market’s expected return is 10% and its standard deviation is 15%. The stock trades at $50, it has β = 0.7 , and the standard deviation of the stock’s return is 25%. There is a call option on the stock expiring in 1 year at strike 100, which costs $40, and a put option at 110, which costs $80. What is the highest Sharpe ratio that you can achieve, by trading (i.e. taking arbitrary large long and short positions in) the stock, the market, and the call and put options, and what strategy do you use to achieve it?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Consider ALZ corp stock. ALZ corp stock does not pay a dividend. The risk-free rate is
7%. The market’s expected return is 10% and its standard deviation is 15%. The stock trades at $50, it has
β = 0.7 , and the standard deviation of the stock’s return is 25%. There is a call option on the stock expiring
in 1 year at strike 100, which costs $40, and a put option at 110, which costs $80. What is the highest Sharpe
ratio that you can achieve, by trading (i.e. taking arbitrary large long and short positions in) the stock, the
market, and the call and put options, and what strategy do you use to achieve it?
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