Stock X has an expected return of 15% based on its current share price and cashflow forecasts. Under the APT, given its risk exposure, the fair expected return is 19%. When constructing her arbitrage portfolio, how would an arbitrageur trade in this situation? а. Buy the stock as price is too low. Buying increases price, reducing return. b. Buy the stock as price is too low. Buying increases price, increasing return. С. Do nothing - without risk-free rate cannot tell. d. Short sell the stock as the price is too high. Selling reduces price, increasing return.

Stock X has an expected return of 15% based on its current share price and cashflow forecasts. Under the APT, given its risk exposure, the fair expected return is 19%. When constructing her arbitrage portfolio, how would an arbitrageur trade in this situation? а. Buy the stock as price is too low. Buying increases price, reducing return. b. Buy the stock as price is too low. Buying increases price, increasing return. С. Do nothing - without risk-free rate cannot tell. d. Short sell the stock as the price is too high. Selling reduces price, increasing return.

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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An antitrust case has lead to you having to calculate a fair return (using the CAPM) for RadioEthiopea common stock. The risk free rate is 3.20%, while the expected return on the market is 4.70%. The shares have a volatility of 21.00%, while the market has a volatility of 13.00%. The correlation between the two sets of returns is 0.44. What is the fair return for RadioEthiopea common stock?
A stock has not been fluctuating much in price. Its average price is $20/share. You expect that the stock price behaves the same way in the next year. A one-year put option is selling for $5, which has an exercise price of $20. Suppose the risk-free rate is 0.05. To make use of your expectation in the future price movement, you establish a straddle strategy to maximize your profits. If the stock price actually ends up at $20 in a year, your profit is $ . Give your answer to 2 decimal places.
Choose one appropriate statement. 1. The movement of stock prices have certain patterns, and investors can make profits by studying such patterns. 2. If a hedge fund manager believes that Toyota will going to outperform Honda she will short stocks of both companies. 3. When one share of Apple stock is being traded at $150, the stock market believes that you can always sell a share of Apple stock for at least $150 in the future. 4. O An undervalued stock should outperform the market in the long run. 5. O Diversification is not appropriate because it would prevent investors from capitalizing on the superior return that can result from a concentrated holding of the stock of one successful company.
6) An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's prospects look neutral, and you estimate the following probability distribution of possible returns: Conditions Recession P Returns on DBB Returns on DVI 0.12 -33% -12% Below Average 0.15 -18% 7% Average 0.46 12% 11% Above Average 0.15 25% 23% Boom 0.12 37% 25% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let's say you want to add another asset, DVI, to your portfolio. You sell 35% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio?
E2
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On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? _______________ Calculate the required return of a portfolio that has $6,000 invested in Stock X and $5,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = __________% If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. RISK (Standard deviation of portfolio return) 60 20 01 4 True 10 20 30 NUMBER OF STOCKS IN PORTFOLIO True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. False 40 ?
Which statement below is incorrect? Select one: A. The four "V" features of big data include volume, variety, value, and velocity. B. When the price of the underlying asset increases, the call option price will increase while the put option price will decrease. C. The Fama-French High-Minus-Low portfolio (HML) is a strategy that attempts to buy stocks with high prices and sell stocks with low prices. D. The passive mutual funds charge a lower administration fee than the active mutual funds.
Give typing answer with explanation and conclusion Which of the following statements is INCORRECT? 1. Black-Scholes model assumes that the yield curve is flat. 2. In a “volatility smile”, all options have the same expiration date, but they have different strike prices. 3. Trading shares of the underlying stock will not affect either the gamma or the vega of a portfolio. 4. All are correct
Don't provide handwritten solution. Suppose Company A's stock return has a volatility of 50% and its correlation with the Market Portfolio is 80%. The expected return on the Market Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree interest rate is 1%. Calculate the expected rate of return on the stock of Company A. Type your answer below, in percentage terms rounded to the nearest whole percent (e.g., 8.05% would be written as 8)

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