Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 18, Problem 4P
Intermediate Problems 4-5
BLACK-SCHOLES MODEL Assume that you have been given the following information on Fire Industries:
Current stock price = $16 | Exercise price of option = $16 |
Time until expiration of option = 6 months | Risk-free rate = 8% |
Variance of stock price = 0.12 | d1 =0.28577 |
d2 = 0.04082 | N(d1) = 0.61247 |
N(d2) = 051628 |
Using the Black-Scholes Option Pricing Model, what is the value of the option?
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Question No. 5:
A rates of return of asset and market have the following distribution:
Steady of Economy
Probability
Stock A
Stock B
Market Return
Boom
0.3
20%
15%
15%
Normal
0.4
5
5%
9
Recession
0.3
12
-10%
18
Correlation Coefficient with market
-0.3
0.3
Calculate the standard deviation of return for the stock A,B and market.
Calculate Beta Coefficient of stock A and B.
Calculate the required rate of return of stock A & B, if you know the risk-free return 6% and market return represents expected return of market.
Year AT&T Stock Returns Market Index Returns
1 8 6
2 7 3
3 10 12
4 14 13
5 8 9
The equation of the characteristic line for AT&T is:
Group of answer choices
Return = 0.538 + 0.9200*Market Return
Return = -3.089 + 1.2436*Market Return
Return = 0.813 + 0.6530*Market Return
Return = 0.471 + 0.0311*Market Return
Return = 4.578 + 0.5607*Market Return
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Assume that the risk-free rate is 5% and the market risk premium is 4%.
a. What are the betas of Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places.
%
Year
2017
2018
2019
2020
2021
%
Stock X
12%
17
-13
2
22
%
Stock Y
15%
7
-4
3
12
Stock X:
Stock Y:
b. What are the required rates of return on Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places.
Stock X:
Stock Y:
c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.
Market
13%
12
-10
2
15
Chapter 18 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 18.A - In words, what is put-call parity?Ch. 18.A - PUT-CALL PARITY A put option written on the stock...Ch. 18.A - PUT-CALL PARITY The current price of a stock is...Ch. 18 - Prob. 1QCh. 18 - Why do options typically sell at prices higher...Ch. 18 - Discuss some of the techniques available to reduce...Ch. 18 - Prob. 4QCh. 18 - Prob. 5QCh. 18 - Give two reasons stockholders might be indifferent...Ch. 18 - OPTIONS A call option on Rosenstein Corporation...
Ch. 18 - OPTIONS The exercise price on one of Boudreaux...Ch. 18 - OPTIONS Which of the following events are likely...Ch. 18 - Intermediate Problems 4-5 BLACK-SCHOLES MODEL...Ch. 18 - FUTURES What is the implied nominal interest rate...Ch. 18 - HEDGING The Zinn Company plans to issue 20,000,000...Ch. 18 - OPTIONS Rachel is considering an investment in...Ch. 18 - BINOMIAL MODEL Misuraca Enterprises current stock...Ch. 18 - Prob. 9PCh. 18 - Prob. 11IC
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- Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?arrow_forwardScenario Probability Expected Return 18% 38% 30% 14% 100% 30% 2 20% 15% -8% 3 4 An analyst creates a probabilistic scenario analysis for projecting stock market returns. The analyst's work is shown in the above table. The Interpretation of the table can be described as follows: The analyst assigns a probability of 18% to the first scenario, which projects a stock market return of 30%. Subsequent rows can be interpreted similarly. The expected return of the analyst's projections is closest to: 100% 16% 30% -8%arrow_forwardQUESTION 1 Exhibit 5.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stock Rit Rmt ai Beta A 10.6 15 0 0.8 Z 9.8 8.0 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)? a. 4.40 b. −1.70 c. 3.40 d. −4.40 e. −1.86arrow_forward
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