Two investors are evaluating GE’s stock for possible purchase. They agree on the expected value of and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stocks for 2 years, while the other holds stocks for 10 years. On the basis of the type of analysis done in this chapter, should they both be willing to pay the same price for GE’s stock? Explain.

Which of the following is correct? O A. Common stock valuation usually treats the common stock as a perpetuity. OB. The appropriate measure for risk according to the capital asset pricing model is beta. OC. The present value of a $100 perpetuity discounted at 5% is $2,000. OD. The incremental cost is the cost of making a choice defined in terms of the next best alternative that is foregone. OE. Both B and C.

You meet with two investors who have different expectations for stock CBD that can be addressed with various positions in puts, calls, and the underlying stock (or combination). For each investor, document the (1) name of the recommended strategy, (2) the components of the suggested trade, and (3) draw the payoff as a function of the stock price. a. Investor A already holds CBD stock and wants to lock in gains if the stock drops below its current levels, while maintaining upside exposure.  b. Investor B wants to profit if CBD’s upcoming earnings announcement is either unexpectedly good or disappointingly bad.  c. Investor C already holds CBD stock and believes the stock will not increase much in the near term. As such, she wants to earn some extra income using options.

A wealth management company contacted Chan and would like to introduce a new stock portfolio to him. This portfolio will consist of three stocks only: X with an expected return of 12%; Y with an expected return of 5%; and Z with an expected return of 2%. Chan is a return-chaser so he plans to invest $2,500 in stock X, $2,000 in stock Y, and $500 in stock Z. What return should Chan expect to earn from this portfolio? O a) 10% O b) Cannot be determined c) 12.2% d) 8.20% e) 15%