A share price is modelled via a two-period binomial model with initial stock price S=40, up/down multiplication factors u =per time period r = 4%.and d =and interest rateExplainDoes this model satisfy the no-arbitrage assumption? Write 0 if your answer is 'no' and 1 if your answer is 'yes'. Answer:your argument in your hand-written answer(b) Calculate the risk-neutral probabilities of up and down movements in the share price. State your answer to three valid digits. Answer: P =Pd=(c)to three valid digits. Answer:Determine the no-arbitrage price of a European call option on the share with strike price K = 70 and expiry time T = 2. State your answerExplain your calculation steps in your hand-written answer.

Call option gives the opportunity to buy stock on expiration but there is no obligation to do that…

share price is modelled via a two-period binomial model with initial stock price s-40, er time period r = 4%. Explain Does this model satisfy the no-arbitrage assumption? Write 0 if your answer is 'no' and 1 if your answer is 'yes'. Answer: wour argument in your hand-written answer Calculate the risk-neutral probabilities of up and down movements in the share price. State your answer to three valid digits. Answer: Pu= Pd= (c) Determine the no-arbitrage price of a European call option on the share with strike price K= 70 and expiry time T = 2. State your answe to three valid digits. Answer: Explain your calculation steps in your hand-written answer. [

share price is modelled via a two-period binomial model with initial stock price s-40, er time period r = 4%. Explain Does this model satisfy the no-arbitrage assumption? Write 0 if your answer is 'no' and 1 if your answer is 'yes'. Answer: wour argument in your hand-written answer Calculate the risk-neutral probabilities of up and down movements in the share price. State your answer to three valid digits. Answer: Pu= Pd= (c) Determine the no-arbitrage price of a European call option on the share with strike price K= 70 and expiry time T = 2. State your answe to three valid digits. Answer: Explain your calculation steps in your hand-written answer. [

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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Questions C and D is required. c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i ( , where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)
1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the above
6. Equilibrium pricing: Let the subscripts: j = 0 denote the risk-free asset, j = 1,...,n the set of available risky securities, and M the market portfolio. For the questions that follow, assume that CAPM provides an accurate description of reality. a. b. C. d. State the CAPM equation. (1) Use the CAPM equation to show that the following condition is true s; ≤ SM for any j. What is the significance of this condition when interpreted in the context of the capital market line? (5) Assume that B = 0.8, μM = 0.1 and r = 0.05. Using the CAPM, determine the expected return from holding one unit of asset j for one period. (2) Given your answer to c.), what could you conclude (from the perspective of the security market line) if a market survey indicated that the forecasted one- period return on asset j was 8 percent? Describe and motivate the rational trading response that is consistent with your conclusion. (4)
Questions C is required. Thank you.c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B).
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.
Stocks A and B have the following data. Assuming the stock marketyls efficient and the stocks are in equilibrium, which of the following statements is CORRECT? \table[[,A,B
Suppose Stock A has B = 1 and an expected return of 11%. Stock B has a B = 1.5. The risk- free rate is 5%. Also consider that the covariance between B and the market is 0.135. Assume the CAPM is true. Answer the following questions: a) Calculate the expected return on share B. b) Find the equation of the Capital Market Line (CML). c) Build a portfolio Q with B = 0 using actions A and B. Indicate weights (interpret your result) and expected return of portfolio Q.
The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True False
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB). (please show all workings)
Question: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A to beta of B.
Assume the price, S, of a non-dividend paying stock follows geometric Brownian motion with drift r and volatility o. Consider a perpetual call option on S. The option is exercised when S = Ŝ, and the payoff on the option is Ŝ– X, where X is the exercise price of the option. Assume all investors are risk-neutral and the instantaneous risk-free rate of interest is a constant, r. Note that the drift of the stock the instantaneous rate of return on the stock-is equal to r. Of course, this makes sense, since the return on all traded assets in a risk-neutral world must be the risk-free rate of interest. Compute the value of the call option C(S;$) and the optimal exercise policy S = arg max[C(S; $)].
When the Black-Scholes and binomial tree models are used to value an option on a non- dividend-paying stock, which of the following is true? O The binomial tree price converges to a price above the Black-Scholes price as the number of time steps is increased O The binomial tree price converges to a price below the Black-Scholes price as the number of time steps is increased The binomial tree price converges to the Black-Scholes price as the number of time steps is increased O None of these ◄ Previous Next ▸

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