Assume the Black-Scholes framework. You are given: i. S (t) is the stock price at time t. ii. The stock's volatility is 25%. iii. The continuously compounded expected rate of return is 8%. iv. The stock pays dividends continuously at a rate of 3% proportional to its price. v. The continuously compounded risk-free interest rate is 4%. vi. The current stock price is S (0) - 125. Calculate Pr (S (4) > 150 S (2) - 120).

Assume the Black-Scholes framework. You are given: i. S (t) is the stock price at time t. ii. The stock's volatility is 25%. iii. The continuously compounded expected rate of return is 8%. iv. The stock pays dividends continuously at a rate of 3% proportional to its price. v. The continuously compounded risk-free interest rate is 4%. vi. The current stock price is S (0) - 125. Calculate Pr (S (4) > 150 S (2) - 120).

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

See similar textbooks

Similar questions

suppose a risk free rate is 6% and the market premium is 7%. D1 is 1.25 per share and stock beta is 1.15. What is the required return?
Assume that the risk-free rate is 6.5% and the market risk premium is 8%. What is the required return for the overall stock market? Round your answer to one decimal place. % What is the required rate of return on a stock with a beta of 0.6? Round your answer to one decimal place. %
Stock A has an expected return of 13.52 percent. Stock B has an expected return of 9.24 percent. Assuming the Capital Asset Pricing Model holds, and Stock A's beta is greater than Stock B's beta by 0.32, what is the expected market risk premium (in percent)? Answer to two decimals
Assume the risk-free rate is 3% and the market return is 10%. Stock X Stock Y Stock Z Beta 0.65 0.90 Current price $13.50 $26.50 Correlation (X/Y) = 0.35 (X/Z) = 0 (Y/Z) = 0.55 a) Most equity research concludes that Stock X is much more volatile compared to the “market". On average, Stock X's volatility is about 1.5 times that of the stock market. Based on CAPM, estimate the required return of Stock X. b) It is expected that Stock Y will pay a per share dividend of $0.43 one year from now, and the dividend will increase by an average of 6% per year in the foreseeable future. According to CAPM, is Stock Y overvalued or undervalued? c) Assume that Stock Z is fairly-priced today. Stock Z has just paid a dividend of $2. It is expected that its dividend will increase by 50% in the first year, 0% in the second year, 10% in the third year, and starting from the fourth year, the company will maintain the dividend growth rate to be 5% forever. How much would Stock Z be worth today if its…
Suppose you have predicted the following returns for stock C in three possible states of nature. What is the expected return of stock C? State Probability Return Boom 0.3 0.15 Normal 0.5 0.10 Recession 0.2 0.02
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.) a. The effect of a change in the market risk premium depends on the slope of the yield curve. b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the level of the risk-free rate. e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
1. If a stock has a(Alpha)=0.002, b(Beta)=1.4, Using the market model (eq. 7.4), find the expected percent return for the above stock if the market return is expected to be 2% and the risk free rate is 1%. 2. Assume stock prices follow a random walk and a particular stock has had the following recent stock prices: Day 1: 129.5 Day 2: 126.9 Day 3: 127.1 what is the best estimate of day 4 prices?
Assume that the risk-free rate is 7.5% and the market risk premium is 3%. What is the required return for the overall stock market? Round your answer to one decimal place. _________ % What is the required rate of return on a stock with a beta of 1.8? Round your answer to one decimal place. _____________ %
i) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
Suppose the common stock of United Industries has a beta of 0.83 and an expected return of 8.7 percent. The risk-free rate of return is 3.4 percent while the inflation rate is 2.8 percent. What is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Assume that the risk-free rate is 7% and the required return on the market is 9%. What is the required rate of return on a stock with a beta of 0.5? Round your answer to two decimal places.
Assume that the risk-free rate is 5.5% and the market risk premium is 7%. What is the required return for the overall stock market? Round your answer to one decimal place. % What is the required rate of return on a stock with a beta of 1.9? Round your answer to one decimal place. %

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS