2. State and graph the appropriate strategies to limit downside risk based on the expected market price performance of underlying asset.) i) (Bullish) ii) (Neutral to bullish) iii) (Bearish) iv) (Neutral to bearish) v) (Extreme volatility)
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
2. State and graph the appropriate strategies to limit downside risk based on the expected market price performance of underlying asset.)
i) (Bullish)
ii) (Neutral to bullish)
iii) (Bearish)
iv) (Neutral to bearish)
v) (Extreme volatility)
b) Suppose you had just gone long 10 lot of Cerah Bhd stock at a price of RM 20.00 each, for a total investment of RM 20,000. 1 lot = 100 shares. You wish to protect yourself from any short term downside movement in price. Suppose 3-month, at-the-money put and call options on Cerah Bhd stock are being quoted at RM 0.20.)
i) Identify the risk exposure you have in stock investment.)
ii) (Outline the appropriate strategy to hedge your current position.)
iii) (What is your risk profile for the selected strategy?)
iv) (Graph the position of your strategy (label all axes/ points))
v) (Calculate the maximum possible loss, maximum profit and break-even point?))
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