Consider a call option on stock XYZ with six months remaining to maturity. In a crisis, the volatility of the share increases and the share price drops. We should expect that: Multiple Choice О the value of the call option increases the value of the call option decreases it is uncertain if the value of the call option increases or decreases

Consider a call option on stock XYZ with six months remaining to maturity. In a crisis, the volatility of the share increases and the share price drops. We should expect that: Multiple Choice О the value of the call option increases the value of the call option decreases it is uncertain if the value of the call option increases or decreases

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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QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68
You've estimated the following expected returns for a stock, depending on the strength of the economy: State (s) Probability Expected return Recession 0.1 -0.05 Normal 0.5 0.06 Expansion 0.4 0.11 What is the expected return for the stock? What is the standard deviation of returns for the stock?
Using the Black-Scholes option pricing formula to determine how many of the following statements are false: [I] The higher the dividend payout, the cheaper the put option, all else equal [II] The put value decreases with volatility, all else equal [III] The lower the current stock price, the cheaper the put option, all else equal
7. Consider the following information about Stocks I and II: Probability of Rate of Return if State Occurs State of Economy Recession Normal Irrational exuberance State of Economy .25 .50 .25 Stock I .02 .21 .06 Stock Il -.25 .09 .44 The market risk premium is 8 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is "riskier"? Explain.
Black-Scholes Model Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $32, (2) strike price is $37, (3) time to expiration is 3 months, (4) annualized risk-free rate is 7%, and (5) variance of stock return is 0.16. Do not round intermediate calculations. Round your answer to the nearest cent.
I 1. If news comes to the market that suggested that the world stock prices will encounter less variability (variance) for the coming years than in the past, what would this mean for an owner of a portfolio which is mostly composed of call and put options? A. This is great news less variability is less risk, which will help portfolio return B. It is unclear if this news will be beneficial or harmful to the portfolio C. This will have no effect on the portfolio as it is immunized from volatility. D. This will be bad news for the portfolio as it has many options within it and option values are higher when volatility is higher. The answer is D, as options increase in value with greater volatility and with less volatility the portfolio will surely be worthless money. O This is great news less variability is less risk, which will help portfolio return O It is unclear if this news will be beneficial or harmful to the portfolio This will have no effect on the portfolio as it is immunized from…
Which of the following stocks is a better buy? What is the difference between expected return and required return for the best stock? Scenario Probability Stock A Stock B Market Risk-free rate Bust 0.25 -0.15 -0.05 Normal 0.55 0.2 0.1 Boom 0.2 0.4 0.3 Beta 1.2 0.9 Expected return 0.13 0.05
Imagine all investors are risk-neutral and we have the following binomial tree: 0 Stock: So= 80 1 100 72 2 120 90 86.4 64.8 Using the risk-neutral option valuation approach, calculate the price of a two-year put option on this stock with a strike price $92. Assume that the risk-free rate is 3% per year. Also assume the stock does not pay a dividend. Pick the closest number.

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