Assume the one period binomial model with initial share price £400, up and down factors u = 1.25, d = 0.9 and interest compounded at nominal rate (per time period) of 7%. Consider an option with payoff (S(0) + S(1))/2. The replicating portfolio for this option at time 0 will have shares and pounds in a bank. State your answers to three significant figures.

Assume the one period binomial model with initial share price £400, up and down factors u = 1.25, d = 0.9 and interest compounded at nominal rate (per time period) of 7%. Consider an option with payoff (S(0) + S(1))/2. The replicating portfolio for this option at time 0 will have shares and pounds in a bank. State your answers to three significant figures.

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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(Capital Asset Pricing Model) Breckenridge, Inc., has a beta of 0.79. If the expected market return is 10.0 percent and the risk-free rate is 6.0 percent, what is the appropriate expected return of Breckenridge (using the CAPM)? The appropriate expected return of Breckenridge is %. (Round to two decimal places.)
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $150,000 or $290,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Required: a. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio? b. Suppose that the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio? c. Now suppose that you require a risk premium of 12%. What price are you willing to pay? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? Note: Do not round your intermediate calculations. Round your answer to the nearest whole dollar amount. Price Required A Required B >
(Same setup as previous question.) The cc risk free rate r = -0.15% (yes, r < 0). The spot price for TFS is So = 42.50, the cc dividend rate is 8%, and the annual volatility o = 30%. Using our standard model for a 2 step tree, what is the replicating portfolio at the node t = 3 months, S = u * So = 48.38206 for a 45 strike call option expiring in 6 months? A = B =
d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%. e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.
Suppose the market risk premium is 6.7% and the risk-free interest rate is 4.9%. Calculate the cost of capital of investing in a project with a beta of 1.3. Question content area bottom Part 1 The cost of capital is enter your response here%. (Round to two decimal places.)
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.
An investor has $1000 initial wealth for investment and he borrows another $500 at the risk free rate. He then invest the entire total amount of $1500 in the market portfolio. What is his portfolio beta?
Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below. A B C Probabilities return 0.05 0.50% -3.60% 3.60% 0.35 0.60% 2.75% 0.15% 0.45 3.66% 1.45% 0.45% 0.15 -4.80% -0.60% 6.30% Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?
“The expected return on an investment with a beta of 1.5 is 150% as high as theexpected return on the market portfolio.” Is this statement true or false? Pleaseexplain briefly.
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank. The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.
In this problem we assume that the annual expected rate of return of the market portfolio is 22% and the annual risk-free rate is 2%. The standard deviation of the market portfolio returns is 22%. Assume the market is in equilibrium such that the Capital Asset Pricing Model (CAPM) holds: the market portfolio is efficient. If you have $1,000 to invest, how should you allocate it to achieve an annual expected return of 26%? Invest $260 in the risk-free asset and $740 in the market portfolio Invest $800 in the risk-free asset and $200 in the market portfolio Invest $1,200 in the risk-free asset and sell short $200 in the market portfolio Borrow $260 at the risk-free rate and invest $1,260 in the market portfolio Invest $200 in the risk-free asset and $800 in the market portfolio Borrow $200 at the risk-free rate and invest $1,200 in the market portfolio

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