9) The local bank that you are a risk manager has a portfolio of options on a traded asset.The delta of the options is -30 and the gamma is -5.i) Explain what these numbers mean.i) The asset price is 20 and its daily volatility is 1%. Use the quadratic model to calculatethe first three moments of the change in the portfolio value.i) Calculate a one-day 99% Value at Risk using the first two moments.iv) From your answer to point ii above, what can you say about the third moment's impacton value at risk calculation?v) Calculate a one-day 99% Value at Risk using all three moments.

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Answered: daily volatility is 1%. Use the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The expected return on a portfolio is 14%, and that the returns have a standard deviation of 10%. Also, the returns are approximately normally distributed. What would be the 1% "value at risk" (VaR) for this portfolio, if the size of the portfolio is $1 million? O $372,500 O $225,500 O $24,500 O $92.500
Using single-period arithmetic returns, calculate the value after two periods for the realized returns of these two portfolios: (Portfolio A) $100 invested, realizing a period with a 10% gain, followed by another period with a 10% gain ("average" 10% per period gain) (Portfolio B) $100 invested, realizing a period with a 50% gain, but followed by a period with a 25% loss ("average" 12.5% per period gain) What is the difference in dollars after these two periods (Portfolio A value minus Portfolio B value)?
Consider the discrete-time binomial tree model with three periods of length 1, i.e. T = 3 and t = 0, 1, 2, 3. In each period the price can move up or down, St+1 is either uSt or dSt. Assume that the factor for moving up is u = 4/3, the factor for moving down is d = 3/4, and that the interest rate is r = 0.0. The initial stock price is So = 1. (a) Compute the price process (i.e. prices at all times and states) for a European Put option on the stock with strike price K = 1 and maturity T = 3. (x - ž) (b) Compute the price at time t = 0 of the Australian option K with ST K = 1. Note: As this option is path dependent, you will not be able to use the recursive method, nor will you be able to use the CRR formula.
Assume that the risk-free rate is 7.7% and the market return is 10%. Calculate the expected rate of return of a stock with a volatility (beta) of 3%.
The expected rate of return on a market portfolio is 7 percent. The riskless rate of interest is 4 percent. The beta of a company is 1.37. What is the required rate of return on this company's common equity?
An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN (Percent) 1.2 1.6 2.0 0.8 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. Which of the following statements best describes the shape of the SML if investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be steeper than it would be if…
Assume that the risk-free rate is 6.4% and the market return is 8%. Calculate the expected rate of return of a stock with a volatility (beta) of 3%.
Required Rate of Return Suppose rRF = 3%, rM = 8%, and rA = 7%. Calculate Stock A's beta. Round your answer to one decimal place. If Stock A's beta were 1.1, then what would be A's new required rate of return? Round your answer to one decimal place. %
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?
Find expected return with beta if -0.8, if risk free rate is 3.4% and expected return on market is 12.3%
The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
assuming Treasury bills yield is 1% and the market risk premium is 7%. If your portfolio beta isstill 0.25, what is the expected return on this strategy?

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daily volatility is 1%. Use the quadratic change in the portfolio value.