Q.20The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He isparticularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few monthsago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixthand twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk-free rate is 5%, and the option has the following characteristics:ABy how much will the price of the options change after the announcement of the dividends? Assume that N(d,)before and after the announcement of the dividend is 0.7654 and N(d₂) before and after the announcement ofthe dividend is 0.5489?BStrike priceExpirationUnderlying's PriceAnnual volatilityTheprice of the option will increase by USD 3.32USD 14013 monthsUSD 15135%The price of the option will decrease by USD 3.32 ABBy how much will the price of the options change after the announcement of the dividends? Assume that N(₂)before and after the announcement of the dividend is 0.7654 and N(d₂) before and after the announcement ofthe dividend is 0.5489?CpriceDExpirationUnderlying's PriceAnnual volatilityThe price of the option will increase by USD 3.32The price of the option will decrease by USD 3.32The price of the option will decrease by USD 3.82USD 14013 monthsUSD 15135%The price of the option will decrease by USD 4.42R

The equation used to determine the hypothetical pricing of options is the Black-Scholes model,…

The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He is particularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few months ago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixth and twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk- free rate is 5%, and the option has the following characteristics: A Strike price Expiration Underlying's Price Annual volatility By how much will the price of the options change after the announcement of the dividends? Assume that N(d₁) before and after the announcement of the dividend is 0.7654 and N(de) before and after the announcement of the dividend is 0.5489? B The price of the option will increase by USD 3.32 USD 140 13 months USD 151 35% The price of the option will decrease by USD 3.32

The risk manager of a large investment bank is reviewing the bank's investments in options contracts. He is particularly interested in call options contracts on shares of Hamilton Invest that the bank bought a few months ago. Hamilton Invest just unexpectedly announced that they would pay a USD 3 dividend per share in the sixth and twelfth months. The risk manager is concerned with the impact of dividends on the option's price. The risk- free rate is 5%, and the option has the following characteristics: A Strike price Expiration Underlying's Price Annual volatility By how much will the price of the options change after the announcement of the dividends? Assume that N(d₁) before and after the announcement of the dividend is 0.7654 and N(de) before and after the announcement of the dividend is 0.5489? B The price of the option will increase by USD 3.32 USD 140 13 months USD 151 35% The price of the option will decrease by USD 3.32

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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Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…
Your stockbroker, John Smith, calls you with a hot stock tip to buy SMITH Inc. The stock is currently selling for $25 a share. You gather the following data to evaluate Smith's recommendation. The risk free rate is 3%, and you demand a 14% return on the market portfolio. SMITH's current dividend is $2.50 a share. You decide to get other necessary estimates from a third-party, Rocky Enterprises. Rocky has estimated that SMITH's beta is 2.0 and that the stock's dividend will grow at a constant 10 percent rate. Based on your estimates, is Smith's recommendation to buy SMITH a good one? What do you think the stock is worth?
Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade call options for Learn Corp., whose stock is currently trading at $18.00. Suppose you are interested in buying a call option with a strike price of $25.20 that expires in 6 months. (Assume that you get the option for free!) Based on speculations and probability analysis, you compute and collect the following information for your price analysis of the option: • For LC’s options, time until expiration (t) is taken as 0.50 year (6 months/12 months). • LC’s stock could go up by a factor of 1.50 (u). • LC’s stock could decline by a factor of 0.60 (d). At this time, LC’s stock price is , and if you exercised the option, your payoff would be . Therefore, if the option is out-of-the-money, you exercise the option. Calculate the ending stock price of Learn Corp. for both possible outcomes and the payoff in both…
A fund manager owns a portfolio of 10 stocks. Explain how the manager can reduce the systematic risk of his portfolio by 10% over the next year using futures. Will the expected return on the manager’s portfolio also drop by 10%? Is it possible for the manager to perfectly hedge his exposure to equity risk? Explain your answers.
An investment counselor calls with a hot stock tip. He believes that if the economy remains strong, the investment will result in a profit of $30,000. If the economy grows at a moderate pace, the investment will result in a profit of $20,000. However, if the economy goes into recession, the investment will result in a loss of $30,000. You contact an economist who believes there is a 20% probability the economy will remain strong, a 70% probability the economy will grow at a moderate pace, and a 10% probability the economy will slip into recession. What is the expected profit from this investment?
Formulate but do not solve the problem. A private investment club has $450,000 earmarked for investment in stocks. To arrive at an acceptable overall level of risk, the stocks that management is considering have been classified into three categories: high-risk, medium-risk, and low-risk. Management estimates that high-risk stocks will have a return rate of 15%; medium-risk stocks, 11%; and low-risk stocks, 5%. The members have decided that the investment in low-risk stocks should be equal to the sum of the investments in the stocks of the other two categories. Determine how much the club should invest in each type of stock if the investment goal is to have a return of $45,000 on the total investment. (Assume that all the money available for investment is invested. Let x, y, and z denote the amount, in dollars, invested in high-, medium-, and low-risk stocks, respectively.) =450,000 =z =45,000
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?
A portfolio manager believes that credit spreads are mean-reverting in the medium term. The manager observes the following information about four corporate issues: Issue 1 2 3 4 O O 1 2 3 Current Spread (bps) 6 month mean spread 4 100 60 130 200 Based on this information, which issue is best to purchase according to mean reversion analysis? 90 90 110 220 6 month spread st.dev. 10 25 15 30
An investor has conducted research on two individual stocks, high-risk (H) and low-risk (L), and the market with the following characteristics: Regarding risk-free rate, the lending rate is 2% and the borrowing rate is 5%. The investor can borrow a maximum of £50,000. He also assumes that non-market movements between stocks H and L are uncorrelated. a) Using the CAPM and the lending rate, calculate the alphas for stocks H and L. Indicate which stocks are over-/under- or correctly priced b) Construct an arbitrage portfolio by first leveraging stock L to match the beta of stock H. Calculate the return difference between the long and short portfolios. (Note: Leveraging means using margin purchase.)
1. You are trying to plan your investments for the next year. You havedecided that the market will either be strong (a bull market), weak (abear market) or normal. You think that stocks, bonds, and bills will earn the following retruns in these secnarios:You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities?(b) What is the volatility of each security return?(c) What is the covariance between stock and bond returns?
Formulate a system of equations for the situation below and solve. A private investment club has $600,000 earmarked for investment in stocks. To arrive at an acceptable overall level of risk, the stocks that management is considering have been classified into three categories: high-risk, medium-risk, and low-risk. Management estimates that high-risk stocks will have a rate of return of 15% / year; medium-risk stocks, 10%/year; and low-risk stocks, 7%/year. The members have decided that the investment in low-risk stocks should be equal to the sum of the investments in the stocks of the other two categories. Determine how much the club should invest in each type of stock if the investment goal is to have a return of $60,000/year on the total investment. (Assume that all the money available for investment is invested.) high-risk stocks $ 24000 X medium-risk stocks low-risk stocks LA LA
(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently 3.5 percent, and the expected return for the market portfolio is 9.5 percent. What should be the expected rates of return for each investment? Security ABCO D Beta 1.57 0.76 1.35 0.89 a. The expected rate of return for security A, which has a beta of 1.57, is %. (Round to two decimal places.)

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