Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.                 BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?

Lisa is a graduate student from Holmes Institute who is actively involved in investment in the securities market. She had established one investment portfolio 5 years ago. Supposing that the forecast on the economic situation and returns of the portfolio will be as follows in the next year, calculate the expected return, variance and standard deviation of the portfolio.    State of economy Probability Rate of returns Mild Recession 0.30 - 5% Growth 0.40 12% Strong Growth 0.30 25%

In the highest-risk Standard & Poor’s rating category that is a CCC/C rating, more than half of the firms default within a year. True or False?

The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2,1% over the coming month. Beta 1.4 Standard Deviation R- of Residuals square 0.65 0.1 (i.e., 10% monthly) Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be 0.5 instead of 1.4. The standard deviation of the monthly market rate of return is 9%. If he holds a $5,000,000 portfolio of Waterworks stock. The S&P 500 currently is at 2,000 and the contract multiplier is $50. a. What is the standard deviation of the (now improperly) hedged portfolio? (Round your answer to 3 decimal places.) Standard deviation % b. What is the probability of incurring a loss on improperly hedged portfolio over the next month if the monthly market return has an expected value of 1% and a standard deviation of 9%? The manager holds a $5 million portfolio of Waterworks…

Alex Smith and Jane Green are portfolio managers at your firm.  Each manages a well-diversified portfolio. Your boss has asked for your opinion regarding their performance in the past year. Alex’s portfolio has a beta of 0.8 and had a return of 9.5%; Jane’s portfolio has a beta of 1.6 and had a return of 11.5%. Which manager had better performance? Why? (Assumer the risk-free rate is 4% and the market risk premium is 5%).

A bank is considering adding secuirtt underwriting services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these services has been estimated to be -.3 and the bank estimates that 80% of its business will be from traditional services and 20% from the new services. What is the standard deviation of the new combined firm?   A) 7.8% B) 10% C) 12% D) 15.5% E) 20%

Mark Washington, CFA, is an analyst with BIC One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. equity markets did indeed fall, but BIC's portfolio performance was disappointing, lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. How many call options should be written to make BIC's overall position delta-neutral? Should the calls be purchased or written? Number of call options The calls should be written

Thank you. It's all done.

12. Portfoliobeta and weights Musashi is an analyst at a wealth management firm. One of his clients holds a $7,500 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Atteric Inc. Arthur Inc. Li Corp. Baque Co. 0.91% Investment Allocation Beta 0.900 O 0.71% 35% 1.13% 20% 15% 30% Musashi calculated the portfolio's beta as 0.960 and the portfolio's expected return as 11.24%. 1.05% 1.500 1.300 0.500 Musashi thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Baque Co. The risk-free rate is 5.00%, and the market risk premium is 6.50%. Standard Deviation According to Musashi's recommendation, assuming that the market is in equilibrium, how much will the portfolio's required return change? 0.53% 0.57% 0.60% 0.64%

In an equity research report, an analyst calculates a forward earnings yield of 12 per- cent. Noting that this yield is considerably higher than the 7 percent yield on a 10-year Treasury, she heads her report with a buy recommendation. Could she be making a mistake?