Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 20, Problem 10PS
Summary Introduction
To compute: The maximum profit or loss earned when an investor does a transaction of buying a put option and selling a call option and draw a diagram for function of stock price.
Introduction:
Strike Price: It is price at which an underlying asset is purchased or sold to implement the options like call option or put option.
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Under which of the following circumstances would you want to buy a stock?
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a.
The HPR is greater than zero.
b.
A stock's holding period return is greater than the CAPM return
c.
A stock's CAPM return is greater than its holding period return
d.
The stock's price is higher than its value
You ask a stockbroker what the firm’s research department expects for the three (3) stocksabove, that is, Stock X, Y and Z. The broker responds with the following information:Stock Current Price Expected Price Expected Dividend X 22 24 0.75 Y 48 51 2.00 Z 37 40 1.25Required:B. Calculate the estimated future rate of return for Stock X, Y, and Z. C. Determine which stock is overvalued, undervalued, properly valued, and state whyD. Illustrate with the use of the Security Market Line (SML) how Stock X , Y and Z wouldappear on it.
Assume that there are three different put options on a stock available and that all of them have the same expiration date. These three options have the following market prices $6, $3, and $1, and strike prices $40, $35, and $30, respectively. Construct a butterfly spread and show the relevant profits and losses. The use of graph is essential.
Chapter 20 Solutions
Investments
Ch. 20 - Prob. 1PSCh. 20 - Prob. 2PSCh. 20 - Prob. 3PSCh. 20 - Prob. 4PSCh. 20 - Prob. 5PSCh. 20 - Prob. 6PSCh. 20 - Prob. 7PSCh. 20 - Prob. 8PSCh. 20 - Prob. 9PSCh. 20 - Prob. 10PS
Ch. 20 - Prob. 11PSCh. 20 - Prob. 12PSCh. 20 - Prob. 13PSCh. 20 - Prob. 14PSCh. 20 - Prob. 15PSCh. 20 - Prob. 16PSCh. 20 - Prob. 17PSCh. 20 - Prob. 18PSCh. 20 - Prob. 19PSCh. 20 - Prob. 20PSCh. 20 - Prob. 21PSCh. 20 - Prob. 22PSCh. 20 - Prob. 23PSCh. 20 - Prob. 24PSCh. 20 - Prob. 25PSCh. 20 - Prob. 26PSCh. 20 - Prob. 27PSCh. 20 - Prob. 28PSCh. 20 - Prob. 29PSCh. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 1CPCh. 20 - Prob. 2CPCh. 20 - Prob. 3CPCh. 20 - Prob. 4CPCh. 20 - Prob. 5CP
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- The price of a stock is: Group of answer choices the future value of all expected future dividends, discounted at the investor’s required return. the present value of all expected future dividends, discounted at the investor’s required return. the present value of all expected future dividends, discounted at the dividend growth rate. the future value of all expected future dividends, discounted at the dividend growth rate.arrow_forwardA stock has a price of $73, which can later be $77 or $69 with equal probabilities. The options with exercise price $77 are valued at $1.53 for the call and $1.73 for the put. a. Calculate the gains/losses/returns for the stock. b. Calculate the gain/losses/returns for a covered call and protective put portfolio.arrow_forwardSections C through F pleasearrow_forward
- A stock is currently selling for $60 a share. What is the percentage gain or loss on the followingtransactions? Identify if it is a gain or loss.a. You take a long position and the stock’s price declines to $50. b. You sell the stock short and the price increases to $70.arrow_forwardWhich of the following techniques is used to value stock options? a. Black-Scholes method b. Zero-coupon method c. Weighted-average method d. Expected earnings methodarrow_forwardAssume the price, S, of a non-dividend paying stock follows geometric Brownian motion with drift r and volatility o. Consider a perpetual call option on S. The option is exercised when S = Ŝ, and the payoff on the option is Ŝ– X, where X is the exercise price of the option. Assume all investors are risk-neutral and the instantaneous risk-free rate of interest is a constant, r. Note that the drift of the stock the instantaneous rate of return on the stock-is equal to r. Of course, this makes sense, since the return on all traded assets in a risk-neutral world must be the risk-free rate of interest. Compute the value of the call option C(S;$) and the optimal exercise policy S = arg max[C(S; $)].arrow_forward
- A stock’s return has the following distribution: Demand for the company’s products Probability of this demand occurring Rate of Return if this demand occurs Weak 0.1 (0.5) Below Average 0.2 (0.05) Average 0.4 0.16 Above Average 0.2 0.25 Strong 0.1 0.60 Use statistical measures to calculate the risk and return of the stock.arrow_forwardThe Price-Earning ratio (P/E) of stock A, B, C are 5, 3, 7 respectively. Which one you should buy?arrow_forwardConsider the three stocks in the following table. Pt represents price at time t, and ot represents shares outstanding at time t. Stock C splits two for one in the last period. Stock Po P1 21 75 65 75 75 75 55 150 50 150 50 150 110 150 115 150 60 300 A B с с 20 75 P2 a. Rate of return b. Rate of return Required: Calculate the first-period rates of return on the following indexes of the three stocks (t=0 to t= 1): Note: Do not round intermediate calculations. Round your answers to 2 decimal places. a. A market-value-weighted index. b. An equally weighted index. 22 % %arrow_forward
- If a stock's expected return plots on or above the SML, then the stock's return is SML, the stock's return is to compensate the investor for risk. cent to compensate the investor for risk. If a stock's expected return plots below the The SML line can change due to expected Inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): Tar 4%; 10 % ; RPM 6%, and beta - 1.1 What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. -75 % If inflation…arrow_forwardDescribe the effect on a call option’s price that results from an increasein each of the following factors: (1) stock price, (2) strike price, (3) time toexpiration, (4) risk-free rate, and (5) standard deviation of stock return.arrow_forwardn the formula ke >= (D1/P0) + g, what does (D1/P0) represent? Select one: a. The expected capital gains yield from a common stock b. The interest payment from a bond c. The expected dividend yield from a common stock d. The dividend yield from a preferred stockarrow_forward
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