Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below.Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock.Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options butno call options. Assume the risk-free rate is rf = 10%.25201510510152025303540-5-10-15Problem 2 Suppose that a stock is currently trading at $60 per share, and the stock price canonly take two possible values one year from now: it can either go up by 25% or down by 20%. Theannual risk-free rate is 4%. Assume that the stock pays no dividends. You are interested in pricingan European put option on this stock. The option has a strike price of $66, and its maturity dateis exactly one year from now.a) What is the payoff on the put option if the stock price goes up by 25%?b) What is the payoff on the put option if the stock price goes down by 20%?c) What is the price of the put option?Problem 3For a two-period binomial model, you are given:• Each period is one year.• The current price for a non-dividend paying stock is $20.• u = 1.2840, where u is one plus the rate of capital gain on the stock per period if the stockprice goes up. • d = 0.8607, where d is one plus the rate of capital loss on the stock per period if the stockprice goes down.• The risk-free interest rate is 5%.Calculate the price of an American call option on the stock with a strike price of $22.

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Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below. Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock. Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options but no call options. Assume the risk-free rate is rf = 10%. 25 20 15 10 5 10 15/20 25 30 35 40 -5 -10 -15

Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below. Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock. Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options but no call options. Assume the risk-free rate is rf = 10%. 25 20 15 10 5 10 15/20 25 30 35 40 -5 -10 -15

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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Suppose that you know that the following well-diversified portfolios are fairly priced in a two-factor economy where the risk-free rate is 5%. Determine the risk premiums associated with each factor and compute the expected market risk premium for the next period based on these figures.: betal beta 2 E(r) p1 1.00 -.5 10% p2 -.5 1.50 10%
The payoff table below indicates the returns (in RM thousands) of investments in stock, bond and fixed deposit under different economic situations. Type of Investment Stock Bond Fixed Deposit Table 1 Economic Situation Good 150 50 45 Stable 60 40 45 Poor -30 36 45 The probabilities of good, stable and poor economy are 0.3, 0.5 and 0.2, respectively. What is the best investment based on the expected monetary value criterion? Draw a decision tree.
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(c)) Discuss the following graphic, which shows the relationship between expected return and portfolio weights. The portfolio is comprised of a debt security D and an equity security E. What would the portfolio strategy be when Wp = 2 and ba WE = -1? 38 (33) -0.5 Expected Return 13% 8% Debt Fund 0 (ebenso) esenicut adol leu@ ledol (loorba (ognerloxel) Ismet tametnl Equity Fund 1.0 0 OC) becida nieu to 2.0 w (stocks) AB -1.0 68 XO.YOUTS RO w (bonds)=1-w (stocks) 15 V10 anollesup Figure 7.3 Portfolio expected return as a function of investment proportions la 21101TO
help me with part C please. thank you so much (a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM). (b) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%. (c) Given the SML in (b), compute the beta and the expected return of the newshare Facebook assuming the volatility of the NASDAQ index (market portfolio) is 23.86% and its covariance with the share is 0.0655.
Please see the attached diagram image. Please show how to solve this problem and please show all steps and formulas in Excel. Based on the Capital Asset Pricing Model (CAPM) and the diagram below, what is the return of the stock if its beta is 1.2 or 0.8?
9. Plot the following risky portfolios on a graph: B 10 11 Portfolio A Expected return, % 8 Standard Deviation, % 13 C D E F 12.5 14 16 20 15 19 19 22 G 20 25 H 23 33 a) Which of these portfolios are efficient? Which portfolios are inefficient? b) Suppose you can also borrow and lend at an interest-rate of 10 percent. Which of the above portfolios is the best one? c) Suppose you are prepared to tolerate a standard deviation of 15 percent. What is the maximum expected return that you can achieve if you cannot borrow nor lend? d) What is your optimal strategy, if you can borrow or lend at 10 percent and are prepared to tolerate a standard deviation of 15 percent? What is the maximum expected return that you can achieve?
2 Problem 2: Consider a market composed of only two risky assets, A and B, with the following properties: a StockA Expected return 25%, SD 20% StockB Expected return 15%, SD 25% a) Suppose their correlation is 0.8. What is the expected return of the following portfolios: one that invests 0% in A, one that invests 10% in A, 20% in A and so on until 100%? Plot the portfolio frontier formed by these portfolios.b) Repeat part (1) under the assumption that the correlation is -0.8.c) Explain in detail what is the intuition behind the difference across the answers you found for part (1) and part (2).
A second version of the Markowitz portfolio model maximizes expected return subject to a constraint that the variance of the portfolio must be less than or equal to some specified amount. Consider the Hauck Financial Service data. Click on the datafile logo to reference the data. Annual Return (%) Mutual Fund Year 1 Year 2 Year 3 Year 4 Year 5 Foreign Stock 10.06 13.12 13.47 45.42 -21.93 Intermediate-Term Bond 17.64 3.25 7.51 -1.33 7.36 Large-Cap Growth 32.41 18.71 33.28 41.46 -23.26 Large-Cap Value 32.36 20.61 12.93 7.06 -5.37 Small-Cap Growth 33.44 19.40 3.85 58.68 -9.02 Small-Cap Value 24.56 25.32 -6.70 5.43 17.31 (a) Construct this version of the Markowitz model for a maximum variance of 38. Let: FS = proportion of portfolio invested in the foreign stock mutual fund IB = proportion of portfolio invested in the intermediate-term bond fund LG = proportion of portfolio invested in the large-cap growth fund LV = proportion of portfolio invested in the large-cap value fund SG =…
Multiple means there is either 1 or more answers
Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?
4. What follows are several portfolios; each is denoted by the term Port. Graph the profit curve at t = T for each of them. Determine the strengths and weaknesses of each portfolio. Namely, explain what a reasonable investor must be expecting to adopt each portfolio. In this listing, CE denotes a Call with strike price E, -CE represents going short on a Call-the Call was sold, PE is a put, -PE is going short on a put, and the numbers E indicate the strike price. (a) A "Long Call" is Port = CE- (b) A "Short Call" is Port = -CE. (c) A "Long Put" is Port = PE. (d) A "Short Put" is Port = - PE. (e) A "Long Straddle" is Port = PE + C£; namely, buy both a Put and Call with the same strike price. (f) A "Short Straddle" is Port = -P - C. (g) A "Long Strangle" is Port = P£₁ +C£₂; namely, it is a purchase of a put at strike price E₁, which is less than the strike price of a Call at E2 (h) a "Short butterfly" is Port = −CE₁ +2CE₂ - CE3 where E₁ < E₂ < E3. (i) A "Long butterfly" is Port = CE₁…

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