PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 26, Problem 25PS
Hedging* You own a $1 million portfolio of aerospace stocks with a beta of 1.2. You are very enthusiastic about aerospace but uncertain about the prospects for the overall stock market. Explain how you could hedge out your market exposure by selling the market short. How much would you sell? How in practice would you go about “selling the market”?
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Students have asked these similar questions
Choose one appropriate statement.
1. The movement of stock prices have certain patterns, and investors can make profits by
studying such patterns.
2. If a hedge fund manager believes that Toyota will going to outperform Honda she will
short stocks of both companies.
3. When one share of Apple stock is being traded at $150, the stock market believes that you
can always sell a share of Apple stock for at least $150 in the future.
4. O An undervalued stock should outperform the market in the long run.
5. O Diversification is not appropriate because it would prevent investors from capitalizing on
the superior return that can result from a concentrated holding of the stock of one successful
company.
Edit question
You think MBB stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take opportunity of any up movement in price but want to strictly limit your downside risk. MBB stock price now is RM 12.00.
a. Given the information below, outline TWO possible appropriate strategies.
For each strategy,
• State the position
• Graph the strategy
• Outline the risk profile, and
• State the maximum profit, maximum loss, and break-even point(s).
30-day calls
30-day put
11 call @ 1.55
11 put @ 0.25
12 call @ 0.70
12 put @ 0.45
12 call @ 0.22
13 put @ 1.40
Rate of return, standard deviation, coefficient of variation Personal Finance Problem Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech Inc.; he
has been impressed with the company's computer products and believes Hi-Tech is an innovative market player. However, Mike realizes that any time you consider a technology stock, risk is a
major concern. The rule he follows is to include only securities with a coefficient of variation of returns below 1.00.
Mike has obtained the following price information for the period 2015 through 2018: Hi-Tech stock, being growth-oriented, did not pay any dividends during these 4 years.
a. Calculate the rate of return for each year, 2015 through 2018, for Hi-Tech stock.
b. Assume that each year's return is equally probable and calculate the average return over this time period.
c. Calculate the standard deviation of returns over the past 4 years. (Hint: Treat this data as a sample.)
d. Based on b and c…
Chapter 26 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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- c. An investor wants to implement a returns-based momentum strategy. Using the method in the Study Guide, what money position should be held in each of the four stocks given below if the total long position is to be $1,000? Explain your reasoning. Security Period 1 Period 2 A 30 40 50 70 60 65 10 12 BCDarrow_forward6) An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's prospects look neutral, and you estimate the following probability distribution of possible returns: Conditions Recession P Returns on.DBB Returns on DVI 0.12 -33% -12% Below Average 0.15 -18% 7% Average 0.46 12% 11% Above Average 0.15 25% 23% Boom 0.12 37% 25% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let's say you want to add another asset, DVI, to your portfolio. You sell 35% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio?arrow_forwardI. The Beta of a Stock You want to invest in the stock market but are not sure which stock to purchase. Information is the key to making an informed investment decision. One piece of information that many stock analysts use is the beta of the stock. Go to Wikipedia (http:/len.wikipedia.org/wiki/ Beta_%28finance%29) and research what beta measures and what it represents. 1. Approximating the beta of a stock. Choose a well-known company such as Google or Coca-Cola. Go to a website such as Yahoo! Finance (http://finance.yahoo.com/) and find the weekly closing price of the company's stock for the past year. Then find the closing price of the Standard & Poor's 500 (S&P500) for the same time period. To get the historical prices in Yahoo! Finance click the price graph, choose Basic Chart, then scroll down and select Historical Prices. Choose the appropriate time period and select Weekly. Finally, select Download to Spreadsheet. Repeat this for the S&P500, and copy the data into the same…arrow_forward
- An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm’s prospects look neutral, and you estimate the following probability distribution of possible returns: Conditions P Returns on DBB Returns on DVI Recession 0.12 -33% -12% Below Average 0.15 -18% 7% Average 0.46 12% 11% Above Average 0.15 25% 23% Boom 0.12 37% 25% a) How much isthe expected return for DBB? b) How much isthe coefficient of variation for DBB? c) Now let’s say you want to add another asset, DVI, to your portfolio. You sell 35% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much isthe coefficient of variation for the new portfolio?arrow_forwardc. Elizabeth is considering investing in Company Z stock. She has conducted some research and gathered data on the possible rate of return for the stock, which is subject to the state of the economy as shown below: State of the Probability for State of the Possible rate of return for еconomy еconomy Company Z stock Expansion 0.2 17% Normal 0.1 13% Recession 0.4 10 % Required: i. Calculate the expected return of the stock ii. Calculate the variane and standard deviation of the stock. ii. Compute the coefficient of variation of the stockarrow_forward(a)Jack is considering investing in the stocks. The two stocks are available with the following particulars: Stock Return %Beta Marvel 9.60.75DC8.71.3 As measured by the return on government stock, a risk-free return in the market is 3.6%.Using capital asset pricing model, Calculate: (i) The rate of return of stock Marvel (Ii) The rate of return of stock DC (iii) Which stock should Jack invest in and why? (b) Explain the advantages and limitations of capital asset pricing model (This is subpart question nor multiple questions) so I humble request please answer I give up thumbarrow_forward
- 1. You think MBB stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take opportunity of any up movement in price but want to strictly limit your downside risk. MBB stock price now is RM 12.00. a. Given the information below, outline TWO possible appropriate strategies. For each strategy, • State the position • Graph the strategy • Outline the risk profile, and • State the maximum profit, maximum loss, and break-even point(s). 30-day calls 30-day put 11 call @ 1.55 11 put @ 0.25 12 call @ 0.70 12 put @ 0.45 12 call @ 0.22 13 put @ 1.40 b. From a cost viewpoint, which is the best strategy? c. What are the recommended options strategies when you expect the markethas extreme (high) volatility?arrow_forwardRisk return exercise : D2L Assessment #7 DePaul, Inc. You are searching for a stock to add to your current stock portfolio. You are interested in DePaul, Inc. You realize that any time you consider a technology stock, it involves elevated risk. The rule you follow is to include only stocks with a coefficient of variation of returns below 1.02. You have obtained the following price information and dividend information: Year Starting Price $40.00 Ending price Quarterly Dividend 1 $42.00 $0.50 $42.00 $47.40 $0.75 3 $47.40 $43.40 $1.00 4 $43.40 $53.40 $1.25 a. Calculate the annual rate of return for each year, 1 through 4, for DePaul stock b. Assume that each year's return is equally probable and calculate the average return over this time period. Calculate the standard deviation of returns over the 4 years. Based on b and c determine the coefficient of variation of returns for the security. Does an investment in this stock fall within the parameters of your investment policy? С. d. e.arrow_forward1. You think MBB stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take opportunity of any up movement in price but want to strictly limit your downside risk. MBB stock price now is RM 12.00. a. Given the information below, outline TWO possible appropriate strategies. For each strategy, • State the position • Graph the strategy • Outline the risk profile, and • State the maximum profit, maximum loss, and break-even point(s). 30-day calls 30-day put 11 call @ 1.55 11 put @ 0.25 12 call @ 0.70 12 put @ 0.45 12 call @ 0.22 13 put @ 1.40 b. From a cost viewpoint, which is the best strategy? explainc. What are the recommended options strategies when you expect the markethas extreme (high) volatility? explainarrow_forward
- 6) An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's prospects look neutral, and you estimate the following probability distribution of possible returns: Conditions Recession P Returns on DBB Returns on DVI 0.12 -33% -12% Below Average 0.15 -18% 7% Average 0.46 12% 11% Above Average 0.15 25% 23% Boom 0.12 37% 25% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let's say you want to add another asset, DVI, to your portfolio. You sell 35% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio?arrow_forwardAn investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm’s prospects look neutral and you estimate the following probability distribution of possible returns: Conditions P Returns on DBB Returns on DVI Recession 0.10 -30% -15% Below Average 0.20 -15% 4% Average 0.40 15% 8% Above Average 0.20 28% 20% Boom 0.10 40% 22% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let’s say you want to add another asset, DVI, to your portfolio. You sell 20% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio? Please show the Excel formulas.arrow_forwardCost of equity: SML. Stan is expanding his business and will sell common stock for the needed funds. If the current risk- free rate is 4.3% and the expected market return is 12.7%, what is the cost of equity for Stan if the beta of the stock is a. 0.62? b. 0.92?arrow_forward
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