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- The slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; VolatilityConsider the Black-Scholes equation for the option price V(S, t) if the underlying does not pay out dividends. (i) Show that V(S,t) = AS, where S is the underlying price, t is time, and A is a constant, is a solution to the Black-Scholes equation. (ii) For the solution V(S,t) = AS, define the value A (Delta) used for hedging.Let a discrete dividend with the dividend yield dy be paid out on the underlying S at time ta. (i) Formulate the jump condition for the underlying price S at time ta and explain carefully the meaning of all parameters and variables you use in the jump condition. (ii) Consider the dividend yield dy = 0.2. The value of S immediately after the dividend payment is S = £10.00. What is the value of S immediately before the dividend payment?
- Differentiate among the expected rate of return (r⁄), the requiredrate of return (r), and the realized, after-the-fact return (r) on astock. Which must be larger to get you to buy the stock, r⁄or r?The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True FalseWhat is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and 1. Interpret your result.
- Draw the profit diagram (profit not payoff) of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. Clearly state any assumptions made. Is the cost of the portfolio positive?If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant?a. Upward sloping.b. Downward sloping.c. Flat.risk premium (RP) expected return on a portfolio,r^P realized rate of return, r¨ diversification correlation coefficient, ρρ firm-specific (diversifiable) risk market (nondiversifiable) risk relevant risk beta coefficient, ββ capital asset pricing model (CAPM) security market line (SML) market risk premium (RPM) equilibrium Define all terms
- An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnConsider the following performance data for a portfolio manager: Benchmark Portfolio Index Portfolio Weight Weight Return Return Stocks 0.65 0.7 0.11 0.12 Bonds 0.3 0.25 0.07 0.08 Cash 0.05 0.05 0.03 0.025 a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike price
